Vehicle Deductions Overview

by Roy A. Lewis, E.A. - January 11, 2008

Just because you drive your vehicle, the expenses of doing so are not automatically deductible. And even if you do use your vehicle for business, you must be careful of the correct rules to apply in order to generate the appropriate deduction.

The IRS recently announced that more than $30 billion in taxes are lost annually due to overstating overall deductions and one of the deductions IRS believes is being overstated is the vehicle deduction. The IRS has issued a fact sheet reminding taxpayers about the vehicle deduction rules.

The highlights include:

• Vehicle use - Not all travel is deductible. Driving from your home to your office is generally non-deductible commuting. Deductible travel includes driving from one work location to another, visiting clients or customers, attending business meetings, or driving to a temporary workplace.
  
  
• Standard mileage method - Certainly the easiest method to use to deduct your vehicle expenses is the standard mileage method. You receive a flat rate deduction (48.5 cents/mile in 2007 and 50.5 cents/mile in 2008. These amounts are adjusted annually) for every business mile traveled. You can use this method even if you lease your automobile.
  
  
• Actual method - Using this method for your vehicle deduction will likely generate a larger deduction if your vehicle is expensive to operate, but it also requires more documentation. To use this method, you divide your business miles by the total miles driven for the year. That computation gives you a business use percentage. You then use this percentage to deduct the actual expenses that you incur to operate the vehicle, such as gas, repairs, insurance, depreciation, and in some cases interest expense.
  
  
• Recordkeeping requirements - Regardless of the method you use, you're required to maintain logs of business miles traveled. If you chose to use the actual method, you'll also have to maintain records for all of the actual auto expenses incurred during the year. Understand that you can use whatever method that provides for the largest deduction, however, once you select a method, you're generally barred from using a different method on the same vehicle in future years.