Car Tax Deduction Options for Your Small Business

The two accepted car tax deduction methods to calculate your vehicle expenses for your small business are the mileage method and the actual costs method. Usually, in the first year you own your vehicle, you should use the mileage method until you determine your actual costs. After the first year, you can choose either the mileage method or actual costs. Read on to find out the details of each method and to learn which costs are not deductible.

Definition of Business Transportation

Business transportation using your car includes travel to visit clients and customers and also travel to business-related meetings and activities in areas outside your local transportation area. If you travel away from home overnight in your car for business, deduct your car costs under the travel expenses section of your tax return.

Mileage Method

The mileage method of car tax deduction is based on a flat rate for mileage traveled. The rate per mile is 50 cents for the tax year 2010. You can also claim the costs of parking fees and tolls that you pay while traveling for business, in addition to the mileage rate. If you drive 30,000 miles a year, with 21,000 of these being business miles and 9,000 personal, you can claim business costs for 70 percent of your total miles driven, using the 50 cents per mile calculation.

Do Not Use the Mileage Method under These Conditions

If your vehicle is being used as a taxi, if you operate a fleet of vehicles (5 or more), or if you drive a rural mail delivery route, you may not use the mileage method to calculate your car tax deduction. You must use the actual costs method.

Actual Costs Method

The actual costs method involves detailed record keeping, but you can claim all of these maintenance and operating costs, verified with receipts:

  • Depreciation
  • Garage rent
  • Gas
  • Insurance
  • Lease payments
  • Licenses
  • Oil
  • Parking
  • Vehicle registration
  • Vehicle repairs and routine maintenance (if not covered by warranty)
  • Replacement tires
  • Toll charges

Again, if you use only one vehicle for personal and business transportation, you can claim a portion of the costs based on your actual miles driven for business purposes.

Other Tax Deductions

You may qualify for a special tax credit if you have purchased any of these vehicles for business transportation: plug-in electric car, plug-in electric/motor drive vehicle, fuel cell vehicle, hybrid motor vehicle, alternative fuel (biofuel or other) motor vehicle, or an advanced lean-burn internal combustion engine vehicle. All of these must meet specific qualifications in the tax credit regulations.

Depreciation

If you buy a car and plan to use it for a number of years, you must depreciate its value over several years, rather than deduct its entire purchase price in the year you bought it. In 2010, the maximum deduction for depreciation for a passenger car, truck or van used for business is $3,060. Learn more from IRS Publication 946 about what the deductions are for cargo vans and trucks.

When You Cannot Deduct Your Business Transportation

If you use your car to travel to and from the same workplace every day, this is considered personal commuting, and the costs involved are not deductible.

blog comments powered by Disqus