Business Use of Your Car

by Stephen P Scott, CPA on February 3, 2012

Many small business owners, self employed individuals, and employees working for others use their automobile for business purposes. If you use your car entirely for that purpose then you may generally deduct the entire cost of operation, subject to some limits. If you use your car both for personal and business purposes, you may deduct on the costs associated with business use only. Below is some helpful information related to auto expenses:

1) Two Methods: You may generally figure the amount of your deductible car expense using one of two methods: 1) The Standard Mileage Rate Method, or 2) The Actual Expense Method. If you qualify to use both methods you may want to figure your deduction both ways to see which gives you the larger deduction.

2) Standard Mileage Rate: 55.5 cents per mile for the 2012 tax year. To use the standard mileage rate method you must own or lease the car and you must not have claimed a depreciation deduction using the Modified Cost Recovery System (MACRS) on the car in an earlier year or any first year additional bonus deprecation. Also, you must not have claimed a Section 179 deduction on the car.

a) Cars you Own: To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then in later years you can choose to use the standard mileage rate or actual expenses.

b) Leased Cars: You must use the standard mileage rate method for the entire lease period, including renewals.

3) Actual Expense Method: To use the actual expense method, you must determine what it actually costs to operate the car for the business portion of the car’s use. These costs include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation or lease payments that are attributable to the business miles driven.

4) Mileage Logs and Documentation: The law requires that you substantiate your expenses by adequate records or by other sufficient evidence. A mileage diary is an excellent way to document mileage and expenses.

In summary, just remember there are two different methods to claiming automobile expenses for tax purposes, the Standard Mileage Method and the Actual Expense Method. Be sure you understand the methods so you can track the proper information for during the year.  It’s very important that you document mileage daily and save your receipts throughout the year.

For additional information see IRS Publication 463 – Travel, Entertainment, Gift, and Car Expenses for more information. If you need assistance from a professional to discuss your specific situation, contact Stephen or Taylor Scott by sending an email to info@scottcpa.com or calling us at 314-984-9829.

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