Automobile (and Other Business Vehicle) Expenses

You can deduct the costs of your business vehicle (as long as those expenses meet the basic requirements for all business expenses).1

The question is how you want to deduct them.

In general, at the time you acquire the vehicle, you can select between two methods:2

The Standard Mileage Rate Method – you deduct a standard rate per mile you travel.

The Actual Expense Method – you deduct your actual costs and depreciate the price of the vehicle.

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.3

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.

Not bad.

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.4

Substantiation. You must keep precise records of your total business mileage, including the time, place, and business purpose of each trip.5

Actual Expense Method

The name of the actual expense method pretty well summarizes how it works. You deduct your actual expenses of the car, including the purchase price (via depreciation), lease payments, gas, insurance, repairs, maintenance, and all other costs that come along with operating a vehicle.

Timing. For most expenses other than purchase price, you can deduct the costs when they occur, depending on your accounting method.

Unfortunately you cannot immediately deduct the cost of the car itself. You have to depreciate it over time, though you can get some current deductions through section 179 expensing.

You may need to capitalize other expenses as well.

Substantiation. Vehicles are listed property, which means you have to keep detailed records for all expenses, including the date, the amount, and the business purpose.6 For more on this, see the glossary write up on record keeping.

As with the standard mileage method, you also need to keep a thorough mileage log that includes the mileage, date, time, place, and business purpose of each trip.