How Much of your Car is Tax Deductable

Tax tips for getting the most bang for your automotive buck.

Mike Vazques, Cincinnati, Ohio
What are the rules governing what tax breaks I can get for a vehicle I use for my business?

By Brandi Stewart, Fortune Small Business staff writer
Dear Mike: When using a vehicle for business purposes, there are generally two ways to deduct the expenses: the “standard mileage rate” method and “actual expenses” method. (See the IRS website for more information.) Before deciding which deduction method is best for you, you may want to first calculate the potential savings using both to see which method will save you the most money.

The standard mileage rate method allows you to deduct daily business mileage. (Expenses related to overnight trips would be considered travel expenses. Details on how to file this type of expense can be found here.) To determine your deduction under this method, multiply the number of business miles driven by the IRS’s standard mileage rate, which is currently 50.5 cents for each business mile driven. Parking fees and tolls can also be added on to the deduction. If you are operating a leased car, you must file under the standard mileage rate method for the entire lease period. Cars that are used for hire (i.e., a taxi) or as a part of a fleet of five or more cars cannot be claimed under this method.

“The main advantage of using the standard mileage rate is that it requires the owner to only keep track of the miles driven for a business purpose, rather than all the yearly expenses of the vehicle,” says Stephen Robison, a Cincinnati-based tax attorney.

However, you may be willing to endure the tedious task of carefully detailing your car-related expenditures if you can save more money by filing under the actual expenses method. This allows you to write off operating costs, which include depreciation, garage rent, gas, insurance, lease payments, licenses, oil, parking fees, registration fees, repairs, tires, and tolls.

To determine the deduction using this method, owners must divide the number of business miles by the total miles driven for the tax year. The quotient should then be multiplied by the cost of the car’s expenses, which will tell you how much you can claim for that vehicle: If the car is driven for both personal and business purposes, only the business use percentage of each expense is deductible.

Some small business owners choose to deduct the entire coast of the car upfront under section 179 of the tax code, which enables business owners to recover the cost of certain property by deducting it during the year the property was first put into service. Generally, a 4-wheeled vehicle that weighs more than 6,000 lbs. and costs up to $25,000 can qualify for a full deduction under section 179.

Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, points out that taxpayers who file their vehicles under section 179 forgo the right to claim the standard mileage deduction. But, the owner can continue to claim the actual expenses of a vehicle filed under section 179.

Another way to recoup the value of a used business vehicle is if you donate it to a charity. If the car is worth less than $500, the owner can simply write it off as a donation without question. For cars that are believed to be worth more than $500, the amount an owner can write off depends on how the charity uses the vehicle. Most charities that receive donated cars resell the vehicles as a way to generate revenue. In this case, the original owner can only deduct the resale price of the auto, which can be significantly lower than what the owner believes the car’s value to be.

“Most of the charities have deals with automobile wholesalers,” says Ochsenschlager. “Expecting to receive a lot of junkers in the process, the wholesalers tend to say, ‘look, whatever cars you get, we’ll pay you X amount per car,’ and then lowball the price.”

To get the most out of your good deed, give your car to a nonprofit that will use it to further the organization’s charitable purpose. “Some charities, like Meals on Wheels, will use the car, so the tax deduction can be the full market value,” says Mel Schwarz, a partner in the National Tax Office of business advisory firm Grant Thornton. In other words, if the nonprofit plans to put the car to use, and agrees with the owner’s assessment of the vehicle’s worth, the owner is entitled to write off the full market value.

Nonprofits that resell donated cars to disadvantaged citizens, such as Charity Cars, can also help philanthropic entrepreneurs reclaim their car’s full market value from Uncle Sam. “The charity may resell the car to a needy person for a nominal amount, but in that case [the taxpayer] is not limited to that amount,” Schwarz says. “You can claim the full market value.”