If a vehicle is used exclusively for business purposes, you may generally deduct the full cost of operating the vehicle, other than expenses attributable to commuting. If you use a vehicle for business on a part-time basis, you will have to allocate your expenses based on your business and personal use.
The IRS classifies all vehicle usage into three categories:
"Business use" is required to deduct expenses. Business use generally means travel between two business destinations, one of which may include your regular place of business. Typical trips that are deductible include:
Vehicle expenses incurred in commuting between your home and your main or regular place of business are never deductible expenses. This is true even if you have an advertising display on your car, or you use the commute to listen to business books on tape or to phone your clients.
However, remember that costs of traveling between your home and a business location that is not your regular place of business is deductible.
You can take advantage of this rule by planning your day so that you make a business related-stop on the way to work and on the way home, thereby converting a portion of your otherwise nondeductible commute into deductible business travel!
Hauling equipment could make added commuting costs deductible. On rare occasions, commuting expenses may be partially deductible if you have to transport heavy or bulky tools, materials, or equipment to and from your workplace and you incur extra expense to do so.
It's best not to think of these as "deductible commuting costs" but as "deductible equipment transportation costs."
Thinking of the expenses as the costs of transporting equipment, tools and supplies will reinforce that only the additional cost of transporting that material is deductible.
To be deductible, you must incur additional costs as a result of transporting the equipment or other items. And, you can only deduct the portion of the cost that is higher than the costs you'd normally face in commuting by that same mode of transportation without the work implements. The fact that you would have used a less expensive mode of transportation were it not for the tools is immaterial.
Robert Jensen takes the train from his home to his workplace each work day. His daily round-trip train ticket costs $10. Every few months he must bring drafting tools and display charts to his workplace for a presentation. When he transports these tools and materials he uses his car instead of taking the train.
Driving to his workplace costs him $20 in gas, tolls, and parking fees. However, Jensen cannot deduct the extra $10 it costs him when he drives to his workplace, since he would have spent that amount driving regardless of what he was carrying with him.
If, however, Jensen's tools and materials were so bulky that he had to rent a trailer to carry them, he could deduct his costs for renting and parking the trailer, as well as any increased toll charges.
If you work out of your home and your home is your principal place of business, you can generally deduct the cost of traveling from home to any business destination. This is true whether the destination is another regular place of business, a temporary place of business (such as a client or project location), or a destination such as a bank, post office, supplier, etc.
If you are a real estate agent and you maintain your principal place of business in your home, you can deduct the expenses that you incur in traveling between your home and the houses you're trying to sell.
Whether your home is your principal place of business is determined under the same standards that apply to home office deductions. If your home doesn't qualify as your principal place of business, you must follow the general rules in determining whether a particular car trip is sufficiently business-related to be deductible.
You must keep mileage records for any business travel you do. In fact, the IRS specifically asks you on your tax return whether you have written evidence of your auto expenses and is likely to deny your deduction if you don't have them.
At a minimum, you should keep a notebook in the car and jot down your odometer reading at the beginning and end of the year. In between, you should jot down your starting and stopping odometer reading for each business trip you take, as well as the reason for the trip.
If you commute to a regular place of business, you'll also need to know the distance from your home to your workplace and the number of commuting trips you made during the year, because the IRS specifically asks for this information.
Most office supply stores carry notebooks designed for this purpose, in a size that's convenient for glove-box storage.
Allocation required for personal use. Only the costs related to business are deductible--the expenses must be allocated between business and personal use. If, like most business owners, you use your vehicle for both business and personal purposes, you must allocate your vehicle costs associated with the business separately from those associated with commuting or personal use. Even if you use a car or truck only for business purposes, you'll need to keep records proving that business use.
At the end of the year, you need to compute:
Then, you divide the number of business miles by the total number of miles driven. The answer you get represents your percentage of business use for the year. Save this number - you'll need it when you compute your deductible vehicle expenses!
Mikio Yamamoto's initial odometer reading for the year was 23,456, and her ending reading was 33,500. So, her total mileage for the year was 10,044.
During the year, she recorded a total of 34 business trips, with a total mileage of 800 business miles. So, her business usage of the vehicle was 800/10,044 = .0796, or about 8 percent.
There are two methods that can be used to compute your vehicle expense deduction for the business use of your car:
if you lease your car you can use either of these methods, but some special rules apply.
If you ever think you might use the standard mileage method, you must use if for the first year that you use your car for business. After that, you can switch between the methods to use the one that gives you the largest deduction.
When you use the actual cost method of determining your vehicle deduction, you must keep track of the actual amount of your costs during the year to calculate your deductible vehicle expenses. The amount of your deduction depends, to a large extent, on how good you are at saving receipts and jotting down your costs throughout the year.
The cost of operating a vehicle includes these expenses:
While it is true that the cost of purchasing a vehicle (as opposed to the cost of operating the vehicle) is not a "deductible business expense," the expensing election under Code Sec. 179 and bonus depreciation (for tax years beginning before 2014) may enable you to "write off" a portion of that purchase price the first year.
The amount you can deduct depends upon the type of vehicle and when you purchased it, among other factors. Consult IRS Publication 463 (2011), Travel, Entertainment, Gift, and Car Expenses for more information.
The standard mileage rate (SMR) is the easiest method to use to claim your automobile expense deduction. If you use the standard mileage rate, then you need to worry only about the odometer reading and the business purpose of your trips.
If you use the SMR method, you calculate the fixed and operating costs of your vehicle by multiplying the number of business miles traveled during the year by the business standard mileage rate. This rate is set by the IRS and is adjusted annually.
Mileage Rate 2013. For 2013, the standard mileage rate for the business use of a car is 56.5 cents per mile.
Mileage Rate 2014. For 2014, the standard mileage rate for the business use of a car is 56 cents per mile.
Who Can't Use the SMR? While very simple to use, the SMR is not available to everyone. Specifically, this rate may not be used to compute the deductible expenses for:
For all practical purposes, if you want to use the standard mileage rate for a car, you must use it in the very first year you place it in service for your business. If you do that, in later years you can switch between the actual cost method, and the standard mileage rate, depending on which method yields the bigger deduction in any given year.
However, once you use the standard mileage rate, you must use the straight-line method of depreciation if you switch to the actual cost method.
Ordinarily straight-line gives you a smaller deduction than the quicker MACRS method of depreciation. The SMR and MACRS are basically incompatible, and if you've ever used MACRS for a car, you can never use the SMR method for that car.
Using the standard mileage rate takes the place of deducting almost all the operating and fixed business costs of your vehicle, such as maintenance and repairs, tires, gas, oil, insurance, and license and registration fees. However, you can still deduct parking fees and tolls that are directly related to business (i.e., not commuting) in addition to the SMR. For business owners, interest on loans for vehicles and taxes attributable to the operation of these vehicles are also deductible in addition to the SMR.
When you use the standard mileage rate method, the mileage rate includes a specific amount for depreciation. This means that you can't claim an additional deduction for depreciation when you use the SMR. It also means that if you use the SMR, when you sell your car and need to determine whether you had any taxable gains, you must adjust the basis of your vehicle for each year the method was used.
For each year the standard mileage rate has been used, you must multiply your business mileage for the year by the amount shown in the chart, and then reduce your car's tax basis (and increase your potential taxable gains) by that amount.
| Year Method Used | Amount of Adjustment (Cents per Mile) |
| 1992-93 | 11.5 |
| 1994-99 | 12 |
| 2000 | 14 |
| 2001-2002 | 15 |
| 2003-2004 | 16 |
| 2005-2006 | 17 |
| 2007 | 19 |
| 2008-2009 | 21 |
| 2010 | 23 |
| 2011 | 22 |
| 2012 & 2013 | 23 |
| 2014 | 22 |
For example, if a car was used for 7,000 business miles in 2013, the basis would be reduced by $1,610 (7,000 x $0.23).
Pre-1990 use of a vehicle in excess of 15,000 miles in one year is disregarded for the purpose of basis adjustment, even if the actual business mileage was higher.
Leasing a vehicle requires special computations. In addition, unless you use the standard mileage rate (SMR) in your first year, then you will not be able to use this method during the term of the lease.
Electing the SMR possible only in first year of lease. If you lease a vehicle for your business, you can elect to use the standard mileage rate, if you do so in the very first year of the lease--and you will need to continue to use this method throughout the entire term of the lease.
If you use the standard mileage rate you are not able to claim a separate deduction for you lease payments. The beauty of the standard mileage rate is nearly all the expenses of operating a car are figured into the rate. However, the simplicity may result in leaving money on the table--or, more accurately, handing it over to Uncle Sam in taxes owed.
Using the actual cost method may save you money. If you want to make sure that you get the maximum deduction and are willing to keep meticulous records of every vehicle-related expense, you can opt to use the actual cost method for computing your vehicle expenses. If you use the actual cost method, you can deduct each lease payment as a rental expense.
You must allocate expenses if there is personal use. When the business use of a leased vehicle is less than 100 percent, the rental deduction is scaled down in proportion to the personal use.
If you use a leased car 75 percent for business, and 25 percent for personal purposes and commuting, you can deduct only 75 percent of the lease payments. The percentage of use for business is determined using your mileage records.
To prevent people from leasing a car to avoid the luxury car depreciation limits that apply to many purchased vehicles, the law requires that you must reduce your deductible lease payments by an amount referred to as the "inclusion amount.
If the fair market value of the car was more than the triggering threshold (see charts, below), you must reduce your deductible lease expenses by the applicable inclusion amount for each year that you lease the vehicle.
To determine the inclusion amount you need three pieces of information:
| Year Lease Began | Fair Market Value |
|---|---|
| 2013 | $19,000 |
| 2008–2012 | $18,500 |
| 2007 | $15,500 |
| 2005–2006 | $15,200 |
| 2004 | $17,500 |
| 2003 | $18,000 |
| 1999–2002 | $15,500 |
| Year Lease Began | Fair Market Value |
|---|---|
| 2010-2013 | $19,000 |
| 2009 | $18,500 |
| 2008 | $19,000 |
| 2007 | $16,400 |
| 2005–2006 | $16,700 |
| 2004 | $18,000 |
| 2003 | $18,500 |
These tables are published in IRS Publication 463, Travel, Entertainment, Gifts, and Car Expenses.There is separate table for leased cars and for leased trucks and vans, so it's important to consult the correct table in doing the calculation.
To use the table, find the value of your car on the first day of your lease term (or on the day you converted your personal car to business use) in the first column, and read across the line to the column that matches the year of your lease to find the dollar value to be included. Then prorate the dollar amount from the table for the number of days of the lease term included in your tax year, and multiply the prorated amount by your percentage of business use for the year (as calculated by using your mileage records).
On January 17, 2013, Michael leased a car for 3 years and placed it in service for use in his business. The car had a fair market value of $32,250 on the first day of the lease term. Michael will use the car 75% for business and 25% for personal purposes during each year of the lease.
For 2013, his inclusion amount is $6. (The dollar amount from the appropriate table ($9) multiplied by his prorated use (349/365) multiplied by his percentage of business use (75%).)
For 2014, his inclusion amount is $15. (The dollar amount ($20) for the full year times the percentage of business use (75%).)
For 2015, his inclusion amount is $22. (The dollar amount ($29) for the full year times the percentage of business use (75%).)
For 2016, his inclusion amount is $1. (The dollar amount from the appropriate table ($35) times his prorated use (16/366) times percentage of business use (75%).)
For each year of the lease that Michael deducts lease payments, he must reduce his deduction by the inclusion amount computed for that year.