How Do I Deduct Car or Truck Expenses?

If you are using your vehicle in a side business, or as an employee in your employer's business, you generally use one of two different methods of calculating and deducting the expenses involved.

Note that both methods require that you be able to document, in writing, both your BUSINESS mileage and your TOTAL mileage on the vehicle for the year. Business mileage does not include commuting to your main place of business, and your expenses do not include parking at that location, which is also non-deductible. If you work out of your home, your mileage to other locations may or may not be deductible, depending on whether your home qualifies as the "principal place of business" under existing rules for deducting business use of your home.

If you elect to use the "Actual Expense" method of deducting expenses, you must keep track of your actual expenditures for gas, oil, insurance, repairs, maintenance, car washes, auto club, and car license plate renewal fees. If you lease your car, it also includes all car lease payments for the year*. If you own your car, it also includes the depreciation allowed on the vehicle for the year*. Interest on a car loan is also deductible, but NOT if you are using the car as an employee. The sum of these expenses is multiplied by the percentage of business use, that is, the ratio of your business mileage to your total mileage.

* NOTE : Special regulations restrict the deduction of depreciation or lease payments on "luxury" cars that have a value over an arbitrary amount. See Publication 463 for the lease inclusion table for such leased vehicles, and for depreciation limits on owned vehicles. For business vehicles placed in service in 1998, the depreciation - before prorating by business use - cannot exceed $3,160.

The second method of deducting auto expenses is the "Standard Mileage Rate" method. This method is not permitted if you (1) lease a car (Tax years 1997 or earlier only), (2) use someone else's car, (3) if you use more than two cars interchangeably for business, OR (4) if the cars are used for hire, such as in a rental fleet or taxi service. Under the standard mileage rate method, you are allowed an arbitrary amount mandated by the IRS (32 ½ for 1998, 32 ½ for 1999 until May 1, 1999 when the rate drops to 31 ½ cents) for each business mile you drive. This is in lieu of all other expenses, EXCEPT: you can deduct the actual costs for business tolls and parking, and you can deduct the business percentage of personal property taxes and (unless you are an employee) car loan interest paid during the year.

Generally, if you elect to use one of these methods in the first year you place the car in service, you use that method for the life of the vehicle. If you need to change methods, see the instructions and limitations detailed in Publication 463.

NOTE : A tax law change, effective for tax year 1998, will allow those who lease a car to use the standard mileage rate, in lieu of all other expenses (including the lease payment) except those specified above. You can freely change from the previously-mandated "actual" method to this method, if you lease a car, effective for 1998.

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