A TAXPAYER CAN DEDUCT all ordinary, necessary, and reasonable expenses associated with the use of his or her own vehicle, i.e., car, van, pickup truck, or panel truck (Rev. Proc. 2010-51, Sec. 3.01), in carrying on a trade or business. The actual vehicle costs include items such as gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (IRS Topic No. 510, "Business Use of Car"). These deductible business costs can be computed by electing either the actual cost method or the standard mileage method, but certain rules associated with either method can lead to unwanted tax consequences.
Under the actual cost method, a taxpayer can depreciate the total cost of the vehicle under the applicable rules for listed property. Once the vehicle is fully depreciated, the taxpayer can continue deducting all the costs, other than depreciation, associated with the business use of the vehicle.
If the vehicle is used less than 100% for business, the taxpayer can deduct only the portion of the expenses associated with the business usage.
For example, if the vehicle was used 75% of the time for business and had costs of $12,000 ($4,000 of depreciation and $8,000 in other costs), the deductible business expense would be $9,000 ($12,0 0 0 X 75%). And if the vehicle is fully depreciated from prioryear usage, then only $6,000 ($8,0 0 0 X 75%) of deductible business costs can be claimed. The point is that under the actual cost method, the deductible depreciation expense is limited to the adjusted basis of the vehicle. It's critical that the taxpayer maintains good documentation of the costs and depreciation claimed under this method.
The standard mileage method is simpler than the actual method to use and maintain in some respects. It requires a taxpayer to maintain the mileage used during the year for business and then multiply that mileage by the standard mileage rate prescribed by the U.S. Treasury Department. For 2018, the standard mileage rate is $0.545 (54.5 cents) per business mile (Notice 2018-3), of which $0.25 is deemed to be depreciation expense. The depreciation component is relevant when the taxpayer needs to calculate the gain or loss from the sale of the vehicle. Unlike the actual cost method, a taxpayer can continue using the standard mileage rate even when the vehicle is fully depreciated (for example, see p. 24 of the 2017 IRS Publication 463).
There are limitations associated with the use...