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Deducting Automobile/Vehicle Expenses

One of the common questions during tax time is about claiming automobile expenses on a tax return. Automobile expense deduction requires a mileage log, or other substantiation, to document the business use of the vehicle. (There are apps to help you track the mileage.) If you are required to have a log and cannot produce one, the IRS will deny the automobile deduction. Below is a brief explanation of how to claim automobile expenses. Automobile expenses are claimed by either:

Actual Method or Standard Mileage Rate Actual Method – the actual method writes off all the operating expenses of the vehicle and the cost of the vehicle is “depreciated” over the life of the vehicle (generally 5 years). In order to determine the amount you can write off, you will need the total miles you drove the vehicle and the “business” miles you drove the vehicle to get the % of business use. For example if you drove the vehicle 15,000 total miles and of this 10,000 was business, the business use is 66.67%. This business use % is multiplied by the expenses to get the deduction. With this method you must keep all receipts to document the expenses.

Mileage Rate – the current mileage rate for 2015 prescribed by the IRS is .575 cents per mile. The mileage rate includes all operating expenses/depreciation except parking fees, tolls and interest. The mileage rate can only be used if you have five or fewer automobiles used at the same time. If you have more than five vehicles used at the same time you must use the actual method. The mileage rate also cannot be used for corporate owned vehicles, or for hire vehicles such as taxi cabs. The mileage rate is a much easier method and will generally give you a larger deduction over time, but only facts and circumstances of your taxes will determine which method will be more advantageous.

NOTE - If you use the mileage rate, you can later change to the actual method. However if you originally chose the actual method, you cannot change to the mileage rate for that vehicle.

Again, both methods require the use of a mileage log, or other substantiation, to determine the business use, or business deduction of the vehicle.

Now we need to discuss commuting which is mileage to and from work so below is an explanation.

Business Transportation vs. Commuting

A. The cost of commuting, traveling between employee's home and his principal or regular place of business, is a PERSONAL, nondeductible expense. If an employee is supplied with a company car, the value of the commuting mileage must be treated as compensation income.  Any reimbursement for commuting mileage on the employee’s own car also must be treated as compensation income. Commuting is personal travel even if the employee does business on the car phone or does paperwork in the back while being driven to work.

B. The critical issue in determining if local transportation expenses are deductible is whether the travel is between an individual's home and a temporary work location or between home and a regular work location.

Please see the graph below for more information.

 

Business Mileage Deduction

source IRS pub 463