Deducting Vehicle Expenses

Operating an automobile or truck is expensive, so anytime we can get some help paying for it we tend to grab it.

Fortunately, some assistance is available in the form of income tax deductions when a vehicle is utilized in trade or business. Unfortunately, this gets the Internal Revenue Service involved in an area of particular sensitivity.

There are two methods available for claiming deductions in connection with the use of a vehicle in trade or business: mileage and actual expense.

The mileage method is the simplest to compute and apply.

It may, however, result in lower deductible expenses, especially if the vehicle is relatively new. All that is required to claim a deduction under this method is to multiply the total number of miles driven for business purposes by the current mileage rate allowed by the IRS (In 1999, that rate is 32-1/2 cents per mile until April 1, and 31 cents per mile thereafter).

If the mileage method is used, deductions cannot be taken for any vehicle operating costs or depreciation, although travel expenses not related to actual vehicle cost (tolls, parking fees, etc.) can be deducted.

When using the mileage method, a log of miles traveled must be kept. The log should be updated at the same time the travel is incurred ("contemporaneously" in IRS jargon) and should include the date of travel, the destination, the business purpose of the travel (name of the person visited and the business relationship), and the beginning and ending odometer readings.

The actual expense method must be used if the following conditions apply:

* There is more than one vehicle used in the business.

* The vehicle is leased.

* Any depreciation has ever been deducted on the vehicle.

The actual expense method involves keeping accurate records of all the expenses incurred in the operation of the vehicle. Use a log similar to the one used for the mileage method and add expenses paid. These expenses are gas, repairs, insurance, tags, interest paid, etc. The costs of depreciation of the vehicle can also be added to the costs deducted. There are limitations, however, on the amount of depreciation that can be taken each year. This varies from year to year and is designed to limit the amount claimed on more expensive vehicles. If the business usage of your vehicle is less than 50 percent, another set of rules applies.

If you use your vehicle for both business and personal purposes, you must be especially careful to document the business portion of the usage. This is a sensitive area with the IRS, since there has been much abuse (intentional and unintentional) of this in the past. If you own only one vehicle you obviously cannot claim 100 percent business use. On the other hand, if you have two vehicles and one has specific capabilities needed for your business and has your business sign on it you can probably claim 100 percent business use and be able to justify it.

Regardless of the method involved, it is very important to keep good records of the business usage and costs of your vehicle.

The time to do that is at the time of usage. Believe me, if you get audited three years later and have not documented business usage and/or costs, you’ll have a hard time getting the agent to allow what you claim.