Tax Topic 510

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Tax Topic 510

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Topic 510 – Business Use of Car
If you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.

You can generally figure the amount of your deductible car expense by using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, you may want to figure your deduction both ways before choosing a method to see which one gives you a larger deduction.

Standard Mileage Rate – For the current standard mileage rate, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses, or search standard mileage rates on IRS.gov. To use the standard mileage rate, you must own or lease the car and:

You must not operate five or more cars at the same time, as in a fleet operation,
You must not have claimed a depreciation deduction for the car using any method other than straight-line,
You must not have claimed a Section 179 deduction on the car,
You must not have claimed the special depreciation allowance on the car,
You must not have claimed actual expenses after 1997 for a car you lease, and
You can’t be a rural mail carrier who received a “qualified reimbursement.”
To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.

For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate.

Actual Expenses – To use the actual expense method, you must determine what it actually costs to operate the car for the portion of the overall use of the car that’s business use. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.

Note: Other car expenses for parking fees and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.

Depreciation
Generally, the Modified Accelerated Cost Recovery System (MACRS) is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct. For additional information on the depreciation limits, please refer to Topic 704. Publication 463, Travel, Entertainment, Gift, and Car Expenses, explains the depreciation limits and discusses special rules applicable to leased cars.

Recordkeeping
The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement. For further information on recordkeeping, refer to Topic 305.

Employees
Accountable Plan – If you’re an employee whose deductible business expenses are fully reimbursed under an accountable plan, the reimbursements shouldn’t be included in your wages on your Form W-2 (PDF), Wage and Tax Statement, and you shouldn’t deduct the expenses.

Nonaccountable Plan – If your employer uses a nonaccountable plan to reimburse you for the expenses, the reimbursements are includable in your wages. Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the total on your Form W-2. You may deduct employee business expenses as an itemized deduction. For a definition of accountable and nonaccountable plans, refer to Publication 463 and Topic 514.

Where to Deduct
Generally, if you’re an employee who intends to deduct your car expenses including expenses that exceed reimbursement under an accountable plan, you must complete Form 2106 (PDF), Employee Business Expenses, or Form 2106-EZ (PDF), Unreimbursed Employee Business Expenses, and itemize your deductions on Form 1040, Schedule A (PDF), Itemized Deductions. Your employee expenses are subject to the 2% of adjusted gross income limit. Refer to Topic 508 for information on the 2% limit.
If you’re self-employed, deduct car expenses on:
Form 1040, Schedule C (PDF), Profit or Loss From Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit From Business (Sole Proprietorship), or
Form 1040, Schedule F (PDF), Profit or Loss From Farming, if you’re a farmer.

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