You can use either the Actual Expense Method or the Standard Mileage Rate Method to compute the deductible costs of operating an automobile for business.
Actual Expense Method
The Actual Expense Method allows you to deduct the actual costs of operating your vehicle including:
Depreciation and possibly Bonus Depreciation
Section 179 Expensing
However, there are three major points that you need to be aware of when using the Actual Expense Method:
The actual deduction you take may be reduced by the Luxury Auto Limits (See our Free Resource Luxury Auto Depreciation Limits, Tables and Explanations)
If you have fully depreciated a car that you still use in your business, you can continue to claim your other actual car expenses.
Substantiation of expenses using the Actual Expense Method generally involves more recordkeeping than the Standard Mileage Rate Method.
Standard Mileage Method
The standard mileage method is the simpler of the two. With this method, you determine your deduction by multiplying your business miles traveled during the year by the IRS standard mileage rate for the year, which is published in a yearly notice.
Example. You drove 15,000 miles for business in the tax year. You multiply the 15,000 miles by the standard rate. If the rate during that tax year is say 56.5 cents per mile, your business deduction for that year is $8,475.
With this method, you cannot deduct other expenses relating to the car itself (like maintenance, depreciation, repairs, gas, etc). However, you can deduct the cost of some related expenses, like parking fees and tolls.
Substantiation for Automobile Expenses
Substantiation for both the Actual Expense Method and the Standard Mileage Rate Method is similar in nature. Both require that you keep a contemporaneous record of the date, time, place, and business purpose of your travel. However, the Actual Expense Method requires you to keep the amounts and receipts for your actual expenses while the Standard Mileage Rate Method requires you to keep track of your mileage for each trip.
Tax law forces you to comply with an overly difficult set of rules when it comes to deducting your business vehicle. Failure to obey some of the rules causes you to lose your legitimate vehicle deductions entirely.
Thank goodness for the Tax Reduction Letter because it takes those nasty rules and clarifies them so you can:
understand them, and
make them work to your advantage.
Check out the vehicle topic list to see how Tax Reduction Letter helps clarify the rules for your tax advantage.