Cars, Cars, Cars

We receive many questions regarding the deductibility of business auto expenses. This column will address some basic rules that apply to car expense. Issues regarding corporate owned vehicles from the corporation's standpoint are not addressed here.

Can I deduct mileage to get to work on my income tax return?

No, travel to your primary place of business from your home is not deductible. These are commuting miles and are not allowed as a deduction. You can, however, take mileage for trips to another site if that site is a temporary work site (expected to last for less than one year) and you will be carrying on the same trade or business at that site that you would be doing at your primary place of work.

But, what if my place of business is my home?

Then the rule changes and you are allowed to deduct the transportation expenses between your home and another work location in the same trade or business. You can either take the actual expenses for the car, which includes gasoline, oil, tires, repairs, insurance, depreciation, parking, fees and tolls, licenses, and garage rent incurred for cars used in a trade or business or you can use the simplified method of the standard mileage rate. In either case written records must be kept. In the case of actual expenses, you must record the amount paid for gasoline, insurance, etc. and keep track of business miles and total miles to establish a business use percentage. If you use the standard mileage rate you must keep a written log of all miles driven for trade or business purposes.

I have a car that I use for my business and I want to deduct depreciation for it on my return. What are the rules?

If you use your car over fifty percent for business purposes, you are allowed to claim MACRS depreciation on your return. Choosing this method of depreciation, however, excludes you from ever using the standard mileage rate on that vehicle in the future. If you are at fifty per cent or lower, then straight line depreciation must be taken. In both situations, you are limited by the percent of business use. Both of these amounts are subject to limitations if the cost of the vehicle used is over $14,700 (a luxury automobile) and the gross vehicle weight is less than 6,000 lbs. If you use the standard mileage rate for deducting your business miles, depreciation is already included in the deduction. If you use the standard mileage rate in the first year of business use for a specific vehicle you are considered to have made an election not to use MACRs for that vehicle.

What if I use more than one car for my business, are there special rules?

If you own two or more cars used in your business at the same time, you cannot use the standard mileage rate for the business use of any car. The key here is that the IRS interprets this literally. You cannot drive two cars at the same time. But, if your spouse or another employee drives the other vehicle at the same time you are driving the other, then you can only take actual expense on those vehicles and depreciation subject to the business use percentage.

I use my car for business purposes, but my employer reimburses me for my expenses, how much can I deduct on my return?

If your employer maintains an accountable plan, one where you must report your expenses to your employer within a reasonable period of time, usually within 60 days, and your expenses were greater than the amount your employer reimbursed you for, you can deduct them on your return by completing Form 2106, but they are subject to the 2%-of-adjusted-gross-income limitation that applies to most miscellaneous itemized deductions.

What kind of record keeping do I have to maintain under an accountable plan in regards to car expense?

The records you must keep depend on whether or not your employer pays you a standard amount based on the federal rate, in the case of a car this would be 40.5 cents per mile for January 1 through August 31 and 48.5 for September 1 through December 31 for the year 2005 or a fixed and variable rate (FAVR). If your employer uses either of these two rates, then you are considered to have adequately accounted for your car expense if the following four conditions apply:

1. Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade or business.
2. The allowance is similar in form to and not more than the federal rate.
3. You prove the time (dates), place, and business purpose of your expense to your employer within a reasonable period of time.
4. You are not related to your employer. If you are related, you must be able to prove your expenses to the IRS even if you have adequately accounted to your employer and returned any excess reimbursement.

Why would I want an accountable plan with my employer and not just a car allowance?

Monies you receive from your employer, under an accountable plan, are not included in your wages and are not taxable to you. A car allowance, however, is treated as taxable income to you. You can then deduct the expense, but only amounts which exceed 2% of adjusted gross income can be deducted on your personal return.

Are there any other times I can deduct car expenses?

Yes. You can deduct mileage at 14 cents per mile for charitable purposes and 15 cents per mile for medical expense on your return. Medical travel is a part of medical expenses, which are deductible only if they exceed 7.5% of your adjusted gross income.

Note:  The IRS increased the optional standard mileage rates for the final four months of 2005.  The rate increases to 48.5 cents a mile for all business miles driven between September 1, and December 31, 2005.  The new four-month rate for computing deductible medical or moving expenses will be 22 cents a mile.  The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.  The increase was due to the sharp rise in gasoline prices.

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