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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 change.

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 do business.

Using 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 regionally.

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 details.

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 updated 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 for sales.

"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 tax money.

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 2106

Instructions for Form 2106

Unreimbursed Employee Business Expenses, Form 2106-EZ

Itemized Deductions, Schedule A

Profit or Loss from Business, Schedule C

Net Profit from Business, Schedule C-EZ

Depreciation and Amortization, Form 4562

IRS Publication 946, How to Depreciate Property

IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses

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 car costs
Just how much these various auto deductions can cut your tax bill also depends on whether you're an employee or small-business operator.

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 on Schedule 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.

Tracking Business Travel
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:
Start from
Go to
Business purpose
Total miles
Parking fees

Record it as you spend it
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 Auburn, Ala.

"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 claim."

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

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