By Julian Block
Do you use your car for business reasons say, seeing clients or customers or to attend meetings, as opposed to nondeductible commuting to and from work? If you do, the tax code allows you to use one of two methods to figure your deductions: actual expenses or a standard mileage rate that is adjusted upward each year to reflect inflation. (Just to be clear, the IRS definition of "car" includes a van, pickup, panel truck, or motorcycle.)
Under this method, you get to write off your allowable operating costs. The list of deductible items includes gas, oil, tires, repairs, license tags, registration fees, insurance, garage rent, lease payments, parking fees, tolls and depreciation. But the interest portion of car payments is not a deductible car expense if you are an employee, though it is deductible if you are self-employed.
CAUTION. Opting for the actual-expense method in the first year the car is used for business requires you to stick with that method as long as you have that car. Moreover, there are restrictions on depreciation deductions for cars used less than 50 percent of the time for business driving. Another limitation applies to cars used for both business and personal driving. You have to divide total costs between the two purposes; the cap on your deductions is the percentage of costs attributable to business use.
Standard Mileage Rate
As an alternative to writing off actual expenses, you may be able to use a standard mileage rate that encompasses depreciation, as well as insurance and other car expenses. The standard rate's advantage is that you are spared the bother of tracking actual expenses; records need to be kept only of business miles driven for the year in question. The standard rate is 36.5 cents per mile for tax year 2002, up from 34.5 cents a mile for 2001 and 32.5 cents a mile for 2000.
Also, employers commonly use the rate to reimburse employees who drive their own cars in the course of their employment. Employees who are reimbursed can deduct actual expenses that exceed the reimbursement.
When standard mileage rate may be used.
The IRS restricts use of the standard rate. To qualify for the standard rate, you must use it in the first year that the car is driven for business reasons. If you claim actual expenses, then, as mentioned earlier, you are precluded from using the standard rate for that car in any later year. But using the standard rate in the first year provides some leeway. In later years, you generally have the option to use the standard rate or actual expenses.
Parking fees and tolls. Besides claiming the mileage allowance, remember to take a separate deduction for parking fees, as well as bridge, tunnel and turnpike tolls that you pay while you are on business. Parking fees that you pay to park your car at your place of work are nondeductible commuting expenses.
TIP. Do you qualify to use both methods? Then there is just one way to know which option provides a larger write-off: figure your deduction both ways. Usually, actual expense is more advantageous than the mileage rate, particularly when there is a prolonged spike in gas prices or your vehicle is a gas-guzzler. But the reverse can be true for folks who have extremely low outlays or scant business mileage.
If the IRS audits your return and questions car expenses, it will not challenge a standard-rate deduction, provided you are able to substantiate the miles driven; actual expenses are disregarded. So you need to keep a glove-compartment diary or other record in which you list the details of when, how far and why you went, along with the cost of parking and tolls.
TIP. In the event an IRS examiner challenges car expenses, those diary entries will be more convincing if they are made close to when the trips take place, not when the filing deadline looms.
What if you lack the records to prove what deductions you incurred? Prove instead what deductions you must have incurred.
EXAMPLE. You neglected to keep an auto log for your business driving. It is still possible to salvage deductions by the use of other records to establish that, for instance, you traveled between your office and a client location twice a week. Multiply the mileage to the client location by the number of trips that you are able to show you made, and you have established a mileage expense that you must have incurred.
Reconcile yourself to a deduction that is less than what you would have been able to substantiate had you kept a complete auto log. Still, you ought to be able to salvage something from nothing.
Form 1040 Paperwork
Which forms you use for listing car expenses depends on whether you are an employee or self-employed. Individuals who are employees must use Form 2l06 (Employee Business Expenses) to list actual expenses and depreciation or the standard mileage rate. Those who are self-employed fill out other forms Schedule C (Profit or Loss from Business) for the mileage rate or actual expenses and Form 4562 (Depreciation and Amortization) for depreciation.
Note, though, that the IRS wants to lessen the paperwork. Someone who is self-employed and not claiming car depreciation (either because the standard mileage rate is used or the car is fully depreciated) needs to use just Schedule C and is excused from filling out Form 4562. But continue to complete Form 4562 when depreciation is claimed. Attach the required forms and schedules to your Form 1040.
A final thought. I advise my clients to claim all car deductions to which they are legally entitled. In my experience, they should not let the possibility of IRS scrutiny cause them to put the brakes on breaks that can significantly lessen the amount siphoned off for income taxes.