A second method used to take a tax deduction for vehicle use is the actual cost method. Actual cost and not the standard mileage rate must be used if your business has more than five cars or leases instead of purchasing the car. Also, to use the actual cost method, the vehicle can’t be used for hire like taxicabs nor can it be considered a piece of equipment like a dump truck.
Like the standard mileage rate the first step to figure your deductible expense using the actual cost method involves keeping an mileage log. Some of my clients think keeping a mileage log is too much of an inconvenience. Once you get into the habit of automatically keeping the mileage log it’s no big deal. Keep a notebook and pencil in your glove compartment and have a set routine of updating the mileage log before you get back out of the car at the end of your business trip.
Calculating the Tax Deductible Mileage
- Note the odometer reading in your car at January 1 or the day you first start using the car for deductible business purposes.
- For every business trip note in your mileage log the beginning odometer reading and briefly describe the business purpose of the trip.
- When you return to your office or home office at the end of your trip note the ending odometer reading and calculate the total miles driven.
- Record your car's odometer reading on December 31st and calculate your business use percentage of the car for the year. My standard mileage rate article walks you through this calculation.
Tax Deductible Vehicle Expenses
Once you know your vehicle's business use percentage most expenses incurred in keeping that vehicle on the road during the year are multiplied by the business use percentage to figure your tax deduction. Examples are gas, insurance, oil changes, new tires, repairs, licenses and registrations.
One notable exception to this tax deduction rule are any repairs or renovations that substantially increases the cars useful life. Routine maintenance such as oil changes or new tires are classified as repair items and treated as a deductible expense right away. If you have to re-build your transmission this expense needs to be added to the basis of the vehicle and depreciated.
Figuring the Actual Cost Method Deductible Expenses
Now, let’s walk through an example of how this works. Total all your receipts. During the year you paid $1500 for fuel, $1200 for insurance and $120 for oil changes. Per your mileage log, your business use percentage is 75%. The allowable business write off is $2,115 {($1,500 + $1,200 + 120) times .75}.
There is one more deductible expense using the actual cost method - depreciation. Depreciation spreads the cost of the car over its useful life. The Internal Revenue Service has very strict guidelines on how business cars are depreciated. Cost, business use, weight and business purpose all play into the calculation.
As a very basic guide, to calculate vehicle depreciation, multiply the cost of the car by the business use percentage. This figure is further multiplied by the IRS allowable depreciation percentage which may be further reduced by the IRS depreciation dollar limit.
