Small Business Tax Deductions: How Much Car Expense Is Tax Deductible?

If you use your vehicle in your small business or self-employment activity

, how much car expense can you write off on your income tax return? Read on to find out.

Vehicle deductions operate on this basic principle: your car-related expenses are tax deductible to the extent you use the car for business purposes. This statement raises the question: how do you determine the business use percentage of your car? Answer: mileage. You must keep a vehicle mileage log to determine the business use percentage. You divide business miles by total miles and the resulting percentage is the extent to which you can deduct your car expenses.

Here's an example: you drive your car a total of 10,000 miles during the year. Of those 10,000 total miles, 5,000 miles were for business purposes. Since 50% of your miles were business miles, 50% of your vehicle expenses can be deducted as a business expense.

This leads us to the next question: what car expenses can be deducted? Answer: you have two options. Option One is known as the Actual Expense Method - you deduct the actual expenses of operating your vehicle, such as gasoline, oil, repairs, maintenance, tires, insurance and lease payments. A portion of the purchase price is also included in this list via the annual depreciation expense and/or the Section 179 deduction. You add up all these actual expenses and multiply that amount by your business use percentage. In the example above, if you had $10,000 in total actual annual expenses, your deduction would be 50% of that amount, or $5,000.

Option Two is known as the Mileage Method - you take the number of business miles and multiply that by an IRS-approved standard mileage rate. This rate is usually in effect for the entire calendar year. For example, in 2010 the rate was 50 cents per mile. So, in the above example, if you drove your car 5,000 miles for business, your deduction would be $2,500 (5,000 miles x .50/mile).

One more question: should you use the Actual Expense Method or the Mileage Method? Answer: it depends. You should run the numbers both ways in the first year and see which approach results in the higher tax savings. You can pick either method in Year One. Should you start with the Actual Expense Method, you must stick with it. If you start with the Mileage Method you are allowed to switch over to the Actual Expense Method. Either way, you can get a nice deduction for the business use of your car, so be sure to keep good records and an accurate mileage log.

by: Wayne M Davies

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