Maximize Car and Truck Deductions

Car and truck expenses for trips on behalf of your trade or business are a deductible business expense.

Your first step involves calculating your Business Use Percentage (“BUP;” see sidebar) for your vehicle. The IRS divides mileage into three categories:

  1. Business;
  2. Commuting
  3. Personal.

Ordinary commuting and personal trips are nondeductible. Trips from home to your first business stop and trips from your last business stop to home are personal. (Daily trips to the bank, post office, and similar stops where you perform no service don’t qualify.)

Travel between temporary business stops is deductible. So, for example, if you leave home, make six business stops, meet a prospect for dinner, then drive home, your mileage between your first stop and the restaurant is deductible. However, if you have a regular business stop

(one that you make at least 8 to 10 times in a six-month period) that you expect to last less than a year, you can count those as business miles, too.1 If home is your principal place of business, then all business trips are deductible.2

Once you’ve calculated your BUP, you have two ways to calculate your deduction:

1. The mileage allowance is 56 cents/mile (2014) plus parking, tolls, and your BUP of interest on your car loan and state and local personal property tax on the vehicle.3 The allowance for charitable use of the vehicle is capped at just 14 cents/mile, and for medical and moving use, 23.5 cents/mile.

2. With “actual expenses,” deduct your BUP of all expenses:

  • Depreciation and interest (purchased vehicles)
  • Lease payments (leased vehicles)
  • Insurance
  • Gasoline, oil, and car washes
  • Tires, maintenance, repairs
  • Licenses, tags, and personal property tax
  • Parking and tolls

Don’t assume that easier recordkeeping justifies settling for the “one size fits all” allowance. It’s the same for every vehicle, no matter how big or expensive. And the wrong choice can cost you thousands. The American Automobile Association (“AAA”) estimates that 2012 actual costs per mile exceeded the IRS flat rate in almost all categories of vehicles and driving habits, at a gasoline cost of $3.36/gallon (see table).

If you own rather than lease your car, you can switch from the allowance to actual expenses. You’ll have to use straight-line, rather than accelerated depreciation. You can’t go the other direction, switching from actual expenses to the allowance, if you’ve claimed any first-year expensing or accelerated depreciation.4

Sources:
  1. Rev. Rul. 94-47.
  2. IRS Pub. 17, page 178 (2011).
  3. IR 2005-138.
  4. Rev. Proc. 2002-61.