Q: Tax Playa, can my car expenses be deducted off my income taxes?
Chris, Arlington VA
A: As a business expense, automobile costs are deductible. Any personal use of a car (including commuting) is not deductible. Eligible taxpayers can choose either the "actual cost" or "standard mileage" systems to account for cost. Overall depreciation and leasing deductions for cars are limited by other special rules.
For more on this topic, consult IRS Publication 463, "Travel, Entertainment, Gift, and Car Expenses."
If you use your car for business purposes, the costs associated with the vehicle are deductible. Commuting is not a business purpose.
You have a choice of how to document your expenses:
- Actual Expenses. These include parking, tolls, loan interest, property taxes, depreciation on the vehicle, repair and maintenance, garage rent, tires, oil, insurance, registration fees, and gasoline. Expenses must be pro-rated between business and personal use.
- Standard Mileage Rate. This method allows a separate deduction for parking and tolls, but lumps all of the other expenses under a per-mile rate. For 2008, the standard mileage rate is $0.505 per mile. Only business-use miles are deductible.
If you want to use the standard mileage rate, you must elect to do so the first year the vehicle is placed in service as a business asset. In subsequent years, you can choose either the standard mileage or actual expenses method.
If you lease the car and elect standard mileage, you must continue to use it for the life of the lease.
You cannot use the standard mileage rate for fleets of cars, cars for hire, or on cars for which expensing/accelerated depreciation has been claimed.
I generally advise clients who have business use of the vehicle to keep track of miles, tolls, and parking fees, and be done with it. Keeping actual expenses is simply not worth any extra deduction amount (which is normally not that large to begin with).
However, for the sake of those who choose to use actual expenses, here are the in's and out's of a few categories of expenses:
- Interest. If you are an employee, the interest is not deductible (as an unreimbursed employee business expense). However, self-employed people can take an interest deduction.
- Taxes. This is deductible as an itemized deduction to employees, and as a business expense to self-employed people.
- Parking and Tolls. As noted above, this is deductible even to those who elect the standard mileage rate.
Depreciation and Leasing
Depreciation merits a further discussion. A car is eligible for Section 179 expensing, but only if the vehicle is more than 50% business use. The usual 179 expense limits apply.
Another option is to take accelerated (MACRS) depreciation on the vehicle. This can also only be done if there is more than 50% business use. The MACRS life is 5 years, and either the straight-line, the 150%, or the 200% declining balance can be elected.
If the car is less than 50% business use, the straight-line method must be used. If the taxpayer is in AMT and the alternative depreciation system must be used, it too has straight-line depreciation and a longer depreciable life.
No matter what method of depreciation is elected, there is an annual limit on the dollar amount of the depreciation taken. The numbers are adjusted for inflation each year, but are roughly the following for cars:
Year 1: $3000
Year 2: $4800
Year 3: $3000
Years 4 and until fully-accounted for: $2000
For trucks and vans, the numbers are a little higher:
Year 1: $3400
Year 2: $5400
Year 3: $3300
Years 4 and until fully-accounted for: $2000
The numbers are still-higher for clean-fuel vehicles.
There is a special rule for expensed SUVs, which have a $25,000 annual limit. Like other expensed vehicles, the 50% business use and usual 179 limitations apply.
As a result, "luxury" cars are not very luxurious for tax purposes. Someone using MACRS at 200% declining balance would only get a full first-year depreciation deduction for a depreciable basis at or below $15,000 in the above example. Someone expensing the car would only be able to do so for $3000 worth of value. You thought I was kidding about the Ford Taurus?
This all makes depreciation a bit confusing with cars (as opposed to how simple and straightforward it is generally :-) )--yet another reason to use the standard mileage rate.
If a car is sold for an amount greater than its adjusted basis (cost minus depreciation plus improvements), then there is a capital gain paid at ordinary income rates. Even if you take the standard mileage rate, some implicit depreciation must be calculated that reduced the basis.
If a car is leased and actual expenses are elected, there is a limit on the leasing expense that can be taken every year if the fair market value of the car is over $16,000 or so and the lease term is more than 30 days. If these terms apply to you, you must reduce your lease deduction by the "inclusion amount," a complicated formula I won't get into here.
Bottom line: if you are eligible to claim business auto expenses, just keep track of miles, tolls, and parking. Use the extra time to be productive in your business.