Automobile Expense Deductions

Posted by: Rod Kurtz on March 6, 2006

Automobile expenses are one of the major tax deductions for small businesses, and making the right choice about how to deduct them can save you hundreds of tax dollars. The choice is whether to use actual expenses, such as costs for gas, maintenance, and insurance, or the standard mileage rate.

Generally, the lower the cost of the car, the more miles you drive, and the longer you keep a car, the more you will benefit from using the standard mileage rate rather than actual expenses. And regardless of whether you use actual expenses or the standard mileage rate, if you finance the purchase of a vehicle, you can still take the interest you pay for a car loan as a business deduction.

One benefit with the standard mileage rate is how depreciation is calculated. If you buy a car for $15,000, you depreciate it over five years and that’s the end of it. The standard mileage rate, on the other hand, has a built-in depreciation factor. If you use the standard rate for as long as you use the auto for business, then you continue to get the depreciation.

The first year you use the car in business is important. If you use actual expenses, you must continue to use actual expenses for the lifetime of the vehicle. However, if you use the standard mileage rate in the first year, you can switch to actual expenses in later years. A good first-year exercise is to keep track of all your expenses and calculate which method will offer the most deductions. If there’s only a few hundred dollars difference between the two, use the standard mileage rate so you’ll be able to switch to actual expenses in later years if that gives you a bigger deduction.

Keith Hall
National Tax Adviser
National Association for the Self-Employed
Grapevine, Tex.

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