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When you use the actual cost method of determining your vehicle deduction, you must keep track of the actual amount of your costs during the year to calculate your deductible vehicle expenses. The amount of your deduction depends, to a large extent, on how good you are at saving receipts and jotting down your costs throughout the year.
The cost of operating a vehicle includes these expenses:
- cleaning, inside and out; waxing
- depreciation, if you own the vehicle
- gas and oil
- insurance
- interest on a vehicle loan
- lease payments, if you lease the vehicle
- license fees, if substantially based on the value of the vehicle
- motor club membership
- parking and garage rental
- personal property taxes
- repairs and maintenance
- tires and supplies
- tolls
The cost of the vehicle itself is not a deductible expense, nor is the cost of a replacement, modification, or extensive repair that prolongs the useful life of the vehicle or increases its value. Such costs are capitalized, which means they are added to your basis in the vehicle. These capitalized costs are recovered through depreciation deductions that are taken for a number of years after you place the vehicle in service.
Expenses incurred for the personal use of your vehicle are generally not deductible.
If, like most business owners, you use a vehicle partly for business and partly for personal purposes, you won't be able to deduct all of your actual auto expenses. Instead, you'll need to add up the expenses for the year and deduct a percentage of them that corresponds to your business use percentage of the car.
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