Michigan State University Extension
Home-Based Business - 09159410
10/01/98
You can take some deductions for business use of your car even if it's driven mostly on personal trips. The legitimate business use of a car can generate significant deductions for small-business owners. The car is used more often with a home-based business than if you worked outside the home. Commuting is not deductible, but other business errands are. Every client meeting or post office run is a legitimate business- mileage expense.
While it is no longer mandatory, keeping a mileage log in your car to demonstrate your business use is a smart idea. If you do not keep a log, and you get audited, you must reconstruct mileage for a year.
A reconstructed defense consists of going through appointment books, maps, canceled checks, and the like to prove how many business miles you drove in a two-month period and then multiplying by six to get the legitimate annual mileage. The IRS won't always give you credit for all the mileage you come up.
To keep a log, simply carry a notebook or clipboard in your car. Whenever you go on a business outing, record the starting mileage and ending mileage, the total miles driven, and the business purpose of the trip. Record the odometer mileage on January 1 and December 31, if you run your business on a calendar year.
For tax year 1994, the IRS allows an income tax deduction of 29 cents for every business mile you drive. You can't take mileage if you lease the car, or if more than one car is used in your business at the same time. If you take the mileage allowance, you may still deduct tolls, parking fees, and similar external costs of driving. And you can deduct the business portion of the interest on your car loan.
You may get a larger deduction by figuring actual auto expenses depending on the number of miles you drive. Actual expenses--which include the cost of the car and everything you spend on it--might come out higher unless you have a car that's very inexpensive to run or you drive many miles. Deducting actual expenses is more complicated than taking the allowance. It means keeping records all money you spend on your car--gasoline, tires, insurance, tune-ups, and the like. When you deduct actual expenses, the amount you deduct is prorated on the basis of your business use of the car, thus you must keep a record of what percent business miles are of total annual miles driven.
Tax laws allow you to write off the car's value over time, as wear and tear makes it worth less. In some cases, you are allowed to accelerate depreciation--write off the car more quickly than its value declines. In other cases, you can only take the "straight-line" method of depreciation--in which you divide your basis in the car by the number of years in its useful life and deduct that amount every year for the life of the car. If you use your car less than 50 percent for business, you are limited to a straight-line depreciation. If you use the car 50 percent or more in business, you can opt for an accelerated depreciation or Section 179 deduction.
Source: Linda Stern, "Get the most mileage out of your 1040", Home Office Computing, January 1993.