When you use your car for both personal and business reasons and you are not fully reimbursed through your employer for the business expenses, you can deduct those costs from your taxes. How do you go about claiming these deductions? Assuming that you itemize, you have two general paths:
- Standard Mileage Method – The IRS prints flat rates of reimbursement per mile driven for each calendar year. For 2016, the reimbursement rates have actually decreased from 2015 levels based primarily on low inflation and lower fuel costs. For business use of your vehicle, the standard mileage rate is 54 cents per mile, down from the 2015 value of 57.5 cents per mile. For 2017, the standard mileage rate will decrease again to 53.5 cents per mile for business miles driven.
- Actual Expense Method – Rather than calculate an average based on miles, you can calculate the actual expenses related to the non-personal use including gas, oil, maintenance costs, depreciation, tolls, parking fees, insurance, and other applicable expenses such as lease payments. IRS Publication 463 covers these in more detail.
If you qualify for both methods, it is worth calculating the total deduction by both methods to see which method works best for you. Employees deducting car expenses must fill out either Form 2106 (partial reimbursement from employer) or Form 2106-EZ (no reimbursement). This will give you the value to enter on Schedule A for itemized deductions. Note that these expenses are among those subject to the limit of 2% of adjusted gross income.
Follow the Instructions for Form 2106 to calculate the actual expenses. Part II of the form discusses allowable and non-allowable actual expenses.
If you lease your vehicle, you are still able to deduct leasing costs, but there may also be an inclusion amount that reduces your lease deduction. IRS Publication 463 gives details on the lease inclusion.
The default method for depreciation calculations is straight-line depreciation. However, if your personal car was used more than 50% for business purposes, you also have a choice between the 200% or 150% declining balance methods. Tables are included in the Form 2106 instructions to illustrate the difference. There are several alternatives for special cases, such as Section 179 depreciation and the special depreciation allowance for the first year of service. Consult Publication 463 for help in determining the best method for your use.
If you are self-employed, deduct your expenses on the appropriate form for your business: Schedule C, Schedule C-EZ, or Schedule F.
Form 2106 allows input for up to two personal vehicles used for business purposes. You can add a separate Form 2106 for two more vehicles. Beyond that, you are considered to be operating a fleet and this deduction is not available.
For leased vehicles, if you use the standard mileage rates, you are required to use the standard rates throughout the total life of the lease. You cannot switch to actual expenses in future lease years.
You can also claim deduction on the use of your personal car for medical or moving purposes, as well as for charitable purposes. For medical and moving expenses, the 2016 rate is down to 19 cents from last year’s 23 cents. Use of your vehicle to serve charitable organizations is still at 14 cents per mile for 2016.
Moving expenses are claimed in a fashion similar to business expenses under IRS Form 3903. For charitable use, see IRS Publication 526 for details. Actual expenses for charitable uses are limited to gas, oil, parking fees, and similar simple expenses. Depreciation, insurance and general maintenance fees are not included.
If the use of your personal vehicle qualifies under one of these categories, explore your deductible options. There is no reason not to take any deduction to which you are entitled. However, make sure you keep meticulous records on any reimbursements that you decide to take.
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