Business Use of Vehicles

The deduction for using vehicles in your business can sometimes be significant, so it's important to make the following decisions:

• Is it better to use the standard mileage rate as your deduction or the actual expenses incurred for a vehicle used for this business?
• Who should own the vehicle? The business, owner or employee?
• Should the business lease or buy the vehicle?

Business vehicles are cars, SUVs and pickup trucks that are used for business activities.

What does not qualify:

• Vehicles used as equipment, such as dump trucks or big rigs
• Vehicles used for hire, such as taxi cabs or airport transporter vans

Luxury Autos

Congress decided years ago that the taxpayers should not subsidize extravagant vehicles used by business. To prevent that, the law squeezes otherwise allowable depreciation deductions for “luxury cars.” But don’t think Rolls Royce or Ferrari. Congress has a much less extravagant view of luxury. In 2007, for example, the maximum first-year depreciation deduction for a business car was set at $3,060 – the amount allowed on a $15,300 car.

Things are much different for vehicles purchased in 2008. As part of legislation designed to stimulate the economy – in this case by encouraging businesses to buy vehicles – the first-year depreciation write-off was raised to $10,960 – the amount of first-year depreciation normally allowed for a $54,800 car. And you can earn that maximum deduction for a car that costs less than $20,000.

The limit is higher for SUVs with loaded vehicle weights over 6,000 pounds. For such vehicles put into use in 2008, $25,000 of the cost can expensed, half of the remaining balance can be claimed as bonus depreciation, then 20% of what’s left can be taken as regular depreciation. On a $50,000 new heavy SUV, $40,000 can be written off in 2008, assuming 100% business use. And for pickup trucks with loaded weights over 6,000 pounds, the entire cost can be expensed if two requirements are met: Their truck beds must be at least six feet long and must be separate from the cab.

The IRS is very fussy about writing off the cost of vehicles, so if you plan to take a vehicle deduction it's essential to keep a detailed log of your business miles and other expenses if you want to write them off, too. We suggest that you pick up a vehicle expense log at an office supply or stationary store and keep it in your car.

Whether to use the standard mileage rate or actual costs is a numbers game. Generally, the more economical the vehicle is to operate, the more likely it is that the standard mileage rate will give you the bigger deduction. Conversely, the higher the operating costs, e.g., gas, repairs, tires, etc. the more beneficial the actual cost method is likely to be.

The IRS allows employees and self-employed individuals to use a standard mileage rate, which for business driving during the first six months of 2008 is 50.5 cents per mile, rising to 58.5 cents per mile for driving in July through December.

To determine the number of miles driven for business you need two numbers for each business vehicle:

• The total number of miles driven during the business year
• The total number of miles driven just for business

Tracking your total mileage for the year is easy. Write down the odometer reading on the day that you start using a vehicle for business and on the day your business year ends.

Business miles are the number of miles actually driven for business, for example, to visit a customer or meet a client.

Remember that any miles driven to the bank, office supply store, computer store, to meet with your accountant or to meet with your lawyer on business matters also count as part of your mileage deduction.

Some travel is not considered business-related:

• Driving from your home to your workplace and back is commuting. It's not deductible on either your business or your individual return.
• If you stop at the store on the way home from a business trip, the remaining miles from the store to home are considered personal mileage, so you can't include them.

You can deduct interest on an auto loan, registration and property tax fees, and parking and tolls in addition to the standard mileage rate deduction, as long as you can prove that they are business expenses.

Using the standard mileage rate is made on a per-vehicle basis.

These are costs that you incur during the business year, such as:

• Gas and oil
• Maintenance and repairs
• Tires
• Registration fees and taxes*
• Licenses
• Vehicle loan interest*
• Insurance
• Rental or lease payments
• Depreciation
• Garage rent
• Tolls and parking fees*

*Also deductible if you choose the standard mileage method.

The percentage of time (based on miles) that the vehicle is used for business determines the deductible portion of these expenses.

Here's how the math works:

Let's say your gas, oil and repairs came to $3,000 for the year. Fees and taxes were $500. Loan interest and insurance were $1,500. Your total "actual" expenses were $5,000.

Your total mileage was 18,000 and documented business miles were 16,202. The business-use percentage is 90% (16,202 / 18,000).

If you used the actual expenses method, you could deduct $4500 (90% of $5,000).

If you used the standard mileage rate, your deduction would have been $7858 (16,202 x 48.5¢). In this case, the standard mileage method gives you the bigger tax benefit.

The business-use percentage usually varies from year to year. Operating expenses are annual expenses and do not affect subsequent years.

This is the amount you can deduct over time for general wear and tear of the vehicle. The standard mileage rate includes an amount for depreciation and reduces the cost of the vehicle when you decide to sell or otherwise dispose of it. In the example above, it works out this way (for simplicity’s sake, we’re assuming all the driving was after June 30).

Standard Mileage Deduction: 16,202 miles x 58.5 cents per mile = $9,478.

Equivalent Vehicle Depreciation included: 16,202 miles x 21 cents per mile = $3,402

If you use the "actual" expenses method, the maximum first-year depreciation deduction for 2008 is:

Type of Vehicle	Deduction
Cars, SUVs and light trucks under 6,000 pounds	$10,960*
Light trucks, vans and SUVs built on a truck chassis	$11,160

In the example above, your depreciation would be limited to the business-use percentage of 90% times the maximum 2008 first-year luxury amount of $10,960, or $9,864.

Since depreciation accumulates, each year's business mileage affects the adjusted basis if the vehicle. The adjusted basis will, in turn, be used to determine the gain or loss when the vehicle is sold or otherwise disposed of, so keeping good records is essential.

Note: Once actual depreciation has been claimed on a vehicle, the standard mileage rate cannot be used. So if you switch from the standard mileage rate to actual, a switch back to the standard mileage rate is disallowed. Similarly, if actual is claimed when you start using this vehicle for business, the standard mileage rate can never be used for that vehicle.

Self-Employed Owner (Sole Proprietor)

The owner may choose to use either the actual expense method or the standard mileage rate method subject to the rules outlined above.

If an employee uses a personal vehicle, the business typically reimburses the employee for the business mileage incurred at the standard mileage rate. The amount received for documented business miles is not taxable to the employee and vehicle expenses are deductible by the employer.

Note: If you are a single-member LLC and file a Schedule C with your personal tax return (Form 1040), you are considered a self-employed owner for tax purposes.

S Corporation/C Corporation

A vehicle used for business may be owned by the corporation or by an employee (even a shareholder employee). The method of claiming the deduction will differ depending on the ownership of the vehicle.

Vehicle Owned by Employee

An employee (or a shareholder employee) who uses a personal vehicle for business can submit a request for reimbursement to the corporation, based on documented business miles. The corporation reimburses the employee based on the standard mileage rate for business.

In this case, the corporation gets a deduction for vehicle expenses paid, and the reimbursement is not reportable as taxable income to the employee.

If the terms of employment require the employee to pay his or her own expenses for travel on behalf of the corporation, the employee claims an unreimbursed employer expense deduction (under miscellaneous itemized deductions on Schedule A of Form 1040). The employee can use the actual method or standard mileage method to calculate the deductible amount.

Vehicle Owned by the Corporation

A corporation must determine the deduction for vehicles it owns based on actual operating expenses. The corporation is also limited by the business-use percentage of the vehicle.

The corporation can deduct all of the operating expenses of the vehicle without regard to the business-use percentage, if the personal-use percentage is treated as income to the employee. The corporation's deduction for the personal-use percentage is treated as a compensation expense.

One more thing: The employee's income for personal use of a corporate vehicle is determined based on the market value of the vehicle, not on the actual expenses or standard mileage rate used to determine the deduction, for example, the cost to rent a vehicle.

Partnership/LLC

The rules are the same as an S Corporation, with one exception: A partner/member who has unreimbursed auto expenses as a requirement of the partnership/LLC agreement can claim the deduction on page one of Schedule E of Form 1040 rather than on Schedule A.

NOTE: It's generally less burdensome for a business to allow an employee (even a shareholder, partner, or member) to use his or her personal vehicle and submit an expense reimbursement request. This eliminates a substantial amount of record-keeping for the employer and employee. The tracking of business mileage cannot, unfortunately, be avoided or eliminated no matter what reporting choice you make.

The same expenses that can be deducted for an owned vehicle can be deducted for a leased vehicle. The standard mileage rate can also be used for a leased vehicle. If you use the standard mileage rate, the vehicle cannot be converted to actual at a later date.

If you use the standard mileage rate for a leased vehicle, the lease payment amount is not deductible.

Leased vehicles are generally not depreciated; the business portion of the lease payment is deducted instead. Also, a "lease inclusion" amount must be added to income when the vehicle is leased instead of owned. This amount is provided by the IRS on a lease inclusion table.

The amount is based on the market value of the vehicle at the time it's placed in service as a business vehicle. The purpose of the lease inclusion is to make the tax benefits between leasing and owning a vehicle equitable.

For example, a vehicle leased in 2008 that is valued at $35,500 would require $103 to be added to income the first year, and $224 to be added in the second year. Subsequent years would require an increased amount to be added to income. (See the lease inclusion table link above).

• Keep detailed records.
• If you drive a lot for business and have few vehicle expenses, use the standard mileage rate to determine your deduction.
• Business use of a vehicle is a legitimate deductible expense and should be claimed by the taxpayer.

Updated for tax year 2008