Don't overlook a prime auto
option: deducting business travel
Gasoline prices are too high, the engine needs
another tune-up and the cost of parking downtown eats all your pocket
It's almost enough to make you consider public
transportation. But don't trade in the
Buick for a bus pass just yet.
If you use your car for your own business, or
even to do the job someone else hired you for, some of the operating
costs may be tax deductible.
Two ways to claim auto use
The Internal Revenue Service gives drivers two ways to calculate
auto expenses. The key to both is good recordkeeping.
One option is to keep track of actual expenses,
such as gas, oil, insurance, vehicle depreciation and mileage. Add
all these up and that's what it costs you to use your car to
a car for business can be a tax-saver. It also can be confusing.
Here are some of the more common things the Internal Revenue
Service says you can -- and can't -- deduct
Actual auto expenses include vehicle depreciation,
licenses, gas, oil, lease payments, insurance, registration
fees, repairs, tires, garage rent, parking fees and tolls.
Even if you use the standard rate, you still
can deduct the cost of business-related parking fees and tolls.
The IRS makes this exception since these rates tend to vary
If you're an employee, interest on a personal
auto loan is not a deductible expense, even if you use the
car only for business purposes.
However, if you're self-employed, you can
deduct the part of the interest that represents business use
of your vehicle.
Commuting is not business travel. But in some
instances, travel to a temporary work location is deductible.
Check out IRS Publication
463, Travel, Entertainment, Gift, and Car Expenses, for
Traffic fines for parking or moving violations
are never deductible expenses.
Or, if you're not into the details of business
travel, you can use the IRS' standard rate. In this case, Uncle
Sam decides annually how much each mile you drive is worth (the
mileage rates are usually published on the agency's
Web site each October) and you simply multiply how far you travel
by this rate. You still have to track your mileage, but don't have
to worry about that extraneous auto stuff.
Do the math first
The obvious advantage of the standard rate is that it's easy
and requires less recordkeeping.
But Mark Luscombe, principal federal tax analyst
for Riverwoods, Ill.-based CCH Inc., stresses
that taxpayers should never avoid a claim because it's complicated:
"If the law allows a deduction, take it."
That said, it generally pays to be as comparative
in your tax break shopping as you are when scouring the local mall
"Just because it's complicated doesn't
mean it will give the best rate," adds Luscombe. So it might
be worthwhile to hang on to all those auto receipts so you (or your
accountant) can run the numbers to see which method saves you more
People who live in large cities usually pay
more for insurance, while small-business owners who finance expensive
company cars pay more interest. And if you live where gasoline prices
hovered around $2 a gallon, those weekly fill-ups really added up.
It might make more tax sense in these cases to count actual driving
dollars rather than take the standard allowance.
Forms and publications you might need to
figure auto deductions
Employee Business Expenses, Form
for Form 2106
Unreimbursed Employee Business Expenses, Form
Itemized Deductions, Schedule
Profit or Loss from Business, Schedule
Net Profit from Business, Schedule
Depreciation and Amortization, Form
Publication 946, How to Depreciate Property
Publication 463, Travel, Entertainment, Gift, and Car
Pick the proper expense method
And if this is the first time you're using your car for business,
choose the expense method carefully. If you qualify to use both
methods, it's generally a good idea to figure your deduction both
ways to see which gives you a larger deduction.
If you opt for the actual expenses method initially,
you're stuck with it for as long as you use that vehicle. This
method might be right for you if you expect several years of depreciating
your vehicle will bring down the tax bite.
However, if you claim the standard mileage rate
when your car is first available for business use, years down the
road you can opt to use the actual expenses method. But this flexibility
also locks you into a less-advantageous auto depreciation system
in the years you decide to tally your actual auto costs.
How employees can claim
Just how much these various auto deductions can cut your tax bill
also depends on whether you're an employee or small-business
If you're an employee who's occasionally
asked to use your car to make a company bank deposit or drive to
a business function, reporting these out-of-pocket expenses could
help cut your tax bill -- but only if you have enough of them.
Business auto use that you pay for is considered
an unreimbursed business expenses and reported on Form
2106. These costs are lumped together with other deductions
the IRS classifies as "miscellaneous" and they must account
A for more than 2 percent of your adjusted gross income to do
you any good.
This means if you make $50,000 you must have
at least $1,001 in business and miscellaneous expenses to make the
deduction worthwhile. That's not an out-of-reach total if you're
continually on the road for your job.
The IRS requires taxpayers to
keep records of business travel. But it doesn't have to
be complicated, just complete. Many tax professionals suggest
drivers simply note the following information in their pocket
calendars or day books:
Record it as you spend
But many people waste this tax deductible travel by not keeping
track of the costs as they happen, notes Doug Sellers, a CPA and
certified internal auditor with HD Vest in
"It's very difficult to try to go
back and recreate such expenses," says Sellers. "Let's
not try to review all that travel over Thanksgiving dinner."
Instead, get in the habit of putting all auto-related receipts in
a shoebox so when it's filing time, you have the data.
It's also important to track your auto
business expenses as they occur because tax law technically requires
a contemporaneous record of travel expenses. "If you start
on Dec. 31 trying to remember what you drove each day of the year,"
notes Luscombe, "under the law they can refuse to accept the
Small business operators
and car costs
But if you're an independent business operator rather than
an employee, then using your car for business and taking the tax
break is simpler, right? Not necessarily.
It's true that when you file a Schedule
C as a small-business owner or sole proprietor, auto expenses
can immediately reduce your profit, meaning less tax. In these cases,
the auto costs are more valuable and generally easier to claim than
the itemized deductions to your personal Form
1040 tax return. (Some business owners try to cut their taxes
even more by making their company car one of the big
SUVs that, in 2003, became eligible for even greater tax breaks.)
It's also true that the IRS looks at auto
claims almost as closely as an insurance inspector. And things can
get a bit sticky if the car is used for business and personal travel.
"In general, if you use the car partly
for business and partly for personal purposes," explains Luscombe,
"an allocation must be made between the types of driving and
good records are going to be required to support the deduction."
And don't try to push those allocations
too far, cautions Sellers.
"I've seen people put a magnetic sign
on a car advertising a business and try to write off the miles as
deductible business costs," he says. "But driving the
kids to day care with a Jack's Plumbing sign on the door is
not business travel."
-- Updated March 22, 2004