If you use your car in your job or business and you use it only for that
purpose, you may deduct its entire cost of operation (subject to limits discussed
later). However, if you use the car for both business and personal purposes,
you may deduct only the cost of its business use.
You can generally figure the amount of your deductible car expense using
one of two methods: the standard mileage rate method or the actual expense
method. If you qualify to use both methods, before choosing a method, you
may want to figure your deduction both ways to see which gives you a larger
deduction. For 2004, the standard mileage rate is 37.5 cents a mile for all
business miles driven. If you use the standard mileage rate, you can add to
your deduction any parking fees and tolls incurred for business purposes.
To use the standard mileage rate, you must own or lease the car; the car
must not be used for hire, for example as a taxi; you must not operate five
or more cars at the same time, as in a fleet operation; you must not have
claimed a depreciation deduction using the Modified Accelerated Cost Recovery
System (MACRS) on the car in an earlier year or any method other than straight-line
for its estimated useful life; you must not have claimed a Section 179 deduction
on the car, the special depreciation allowance; and you must not have claimed
actual expenses after 1997 for a car you leased. You cannot use the standard
mileage rate if you are a rural mail carrier who received a "qualified reimbursement".
Further, to use the standard mileage rate for a car you own, you must choose
to use it in the first year the car is available for use in your business.
Then, in later years, you can choose to use the standard mileage rate or actual
However, for a car you lease, you must use the standard mileage rate method
for the entire lease period. For leases that began on or before December 31,
1997, the standard mileage rate must be used for the entire portion of the
lease period (including renewals) that are after 1997.
To use the actual expense method, you must determine what it actually cost
to operate the car for business purposes. Include gas, oil, repairs, tires,
insurance, registration fees, licenses, and depreciation (or lease payments)
attributable to business miles driven.
Other car expenses for parking fees, and tolls attributable to business
use are separately deductible, whether you use the standard mileage rate or
Generally, the Modified Cost Recovery System is the only depreciation method
that can be used by car owners to depreciate any car placed in service after
1986. However, if you used the standard mileage rate in the year you place
the car in service, and change to the actual expense method in a later year
and before your car is fully depreciated, you must use straight–line
depreciation over the estimated remaining useful life of the car. There are
limits on how much depreciation you can deduct. For a car qualifying for the
special depreciation allowance that is first placed in service in 2004, the
maximum depreciation allowance for 2004 (including the section 179 deduction
and the special depreciation allowance) is $10,610 (or $10,910 for a truck
or van) multiplied by the percentage of overall use that is business use.
The maximum 2004 allowance for depreciation (including the section 179 deduction)
for a car placed in service in 2004 that doesn't qualify for the special allowance
is $2,960 (or $3,260 for a truck or van) multiplied by the business use percentage.
These maximum amounts vary for cars placed in service before 2004. For additional
information on the depreciation limits, please refer to Topic 704. Publication 463, Travel, Entertainment, Gift, and Car Expenses, explains
the depreciation limits, and it discusses special rules applicable to leased
The law requires that you substantiate your expenses by adequate records
or by sufficient evidence to support your own statement. For further information
on record keeping, refer to Topic 305.
If you are an employee whose deductible business expenses are fully reimbursed
under an accountable plan that meets the 3 accountable plan rules, the reimbursement
should not be included in your wages on your Form W-2(PDF), and you should not deduct the expenses.
If your employer uses a non–accountable plan to reimburse you for
the expenses, the reimbursements should be included in your wages. Your employer
will combine the amount of any reimbursement or other expense allowance paid
to you under a non–accountable plan with your wages, salary, or other
compensation and report the total on your Form W–2. Your employee
business expenses may be deductible as an itemized deduction. For a definition
of Accountable and Non–Accountable plans, refer to Publication 463 and Topic 514.
Generally, if you are an employee, to deduct your car expenses including
expenses that exceed reimbursement under an accountable plan, you must complete Form 2106(PDF) or Form 2106-EZ(PDF) and
itemize your deductions on Schedule A of Form 1040(PDF). Your expenses will be subject to the 2% of adjusted gross income
limit. Refer to Topic 508 for information on the 2% limit. If you
are self–employed, car expenses are deductible on Schedule C Form 1040(PDF) or Schedule C–EZ of Form 1040(PDF), or on Schedule F of Form 1040(PDF) if
you are a farmer.
For more information, refer to Publication 463.