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Business Use of Autos

Generally, there are two methods of deducting business use of a vehicle.

1.  The “actual expenses” method involves keeping records of all expenses related to your vehicle such as gas, maintenance, and depreciation. On a newer vehicle, the larger depreciation gives typically a larger deduction (early in the depreciated life) over that of the “mileage method”. After the end of the depreciation on the vehicle, your only deductions would be gas, maintenance, insurance etc. Depreciation can run as long as 5 years, typically is accelerated and starts when the vehicle was “placed in service” for business use. Other options for depreciation include expensing elections that further increase deductions in the first year(s). See our "Expensing Vehicles" page for more information.

Remember that you still need to keep a log of your business mileage. Even if you use the “actual expense” method, you need to have documentation of your business use. Mileage logs provide a method of allocation of expenses between business and personal.

2.  The second method is to use the “standard mileage rate”. This method involves multiplying your business miles by a rate determined by the IRS. Publication 463 lists the standard mileage rates for the prior year. These change every year and sometimes more than once a year. This is supposed to provide a deduction that, on average, is equal to the actual expenses of running an auto, including depreciation, repairs, gas etc. If you use your vehicle for personal use, keep a log of your business miles.

Remember to keep track of tolls, parking, town tax and interest on your auto loan . These are deductible (for the business portion) under either method.

Variations on the methods above include switching from one method to the other. One restriction for switching is that you must have used straight-line depreciation under the “actual expense” method to switch to the “mileage method”.

You can imagine scenarios where one method would be advantageous over the other. The “actual expense” method might provide a greater deduction with a new vehicle when depreciation expense is high. The “mileage method” might prove better for an older vehicle that is reliable and has few repairs.

 

     
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