Winter, 2009

Individual taxpayers who use a passenger automobile, including "luxury" automobiles, in the pursuit of business or in an income-producing activity can deduct certain costs related to its acquisition and maintenance. The deductible items include gas, oil, tolls, parking fees, insurance, and depreciation. All of the expenses must be allocated between business use and nondeductible personal use. Use of an automobile for commuting to and from work is a personal, nondeductible use. Also, using your car as an employee is treated as business use only if that use is for the convenience of the employer and is a condition of employment.

Instead of figuring actual expenses, you can use the standard mileage rate of 50.5 cents per mile for 1/1/08 - 6/30/08, 58.5 cents per mile for 7/1/08 - 12/31/08, and 55 cents per mile for 2009. The standard mileage deduction is in lieu of deducting operating and fixed costs of the automobile. Depreciation is a component of the standard mileage rate, therefore, the basis in the automobile must be reduced by the depreciation allowed. However, if you use the standard mileage deduction, you can still deduct parking fees, tolls, interest relating to the automobile's purchase, and state and local taxes.*

If you want to use the standard mileage for a car in any year, you must choose to use it in the first year you place the car in service in your business. After the first year you can switch to deducting actual expenses, however, depreciation is calculated using the straight line method. You cannot switch from using actual expenses to the mileage method.

If you choose to deduct actual expenses, you can deduct such items as oil, gas, insurance, depreciation, etc. Generally, you must use a car more than 50% for business to qualify for the §179 expensing deduction and the accelerated depreciation deduction. Regardless of the depreciation method used, the yearly limit allowed is determined by the year the automobile is placed in service and the percentage of business use. If an automobile is placed is service in 2008, the depreciation deduction cannot be more than $2,960 for the year unless the vehicle qualifies for the 50% bonus depreciation, then the limit is $10,960. This limit is reduced by the personal use percentage.

A passenger automobile is defined as a 4-wheeled vehicle manufactured primarily for use on public roads that are rated at 6,000 pounds unloaded gross vehicle weight or less. Some sport utility vehicles do not fall within this category and are not subject to the luxury automobile depreciation limitations resulting in greater business deductions.

I hope this helps you to understand the issues concerning business use of an automobile. As you can see, this is a complicated area. As such, we urge you to contact us to set up a meeting to discuss these issues more thoroughly.

*    Please note that interest is only deductible for a business, not as an employee incurring business expense.