How to Write Off Automobile Expenses

If you use your vehicle for business purposes, you have a deductible expense…but only to a certain extent.

I’ve worked with many clients hoping to write off every dime associated with their vehicle, even personal use. But the IRS won’t allow this. If the car is company-owned (the title is in your corporate name), and you use this corporate asset for personal reasons, then you will have to claim that use as a taxable fringe benefit on your W2.

You can only deduct the business usage of your automobile expenses. Here are the ground rules:

  1. If you use the vehicle for more than 50% business, you may deduct actual expenses including deprecation, prorated to the business use. So let’s say your vehicle expenses of fuel, repairs, insurance, depreciation, garage rent, car washes, loan interest, etc. total $10,000. You figure your business use at 70% by logging a total of 20,000 miles with 14,000 miles strictly for business purposes: you will be entitled to a deduction of $7,000.
  2. If you so wish, you may use mileage rather than actual expenses. In fact, you are required to use mileage if business use is less than 50%. For 2012, you may deduct 55 ½ cents per mile.

You must substantiate your business use in the event of an audit. And believe me, they ask for mileage logs, and you are required to keep one. But here’s the deal, no one ever keeps one. I did have a client once who kept one, but of course he was never audited.

An auditor will argue for a bit saying he can disallow the deduction because no contemporaneous records were kept—but I inevitably state that it’s impossible to attach a clipboard to a steering wheel and finally the auditor consents to a reconstruction. Always keep your appointment book, and once the year is over, store it in your tax file. This provides a safety net if you are audited so you can reconstruct your travels.

Of course, keeping something of a mileage log that will prove acceptable in audit isn’t that tough. Here’s the drill:

To add to the credibility of your claims, on Jan. 1 log in your beginning mileage from your odometer into your appointment book and then put a note on the page for Dec. 31 to list your ending odometer reading. The IRS asks for the total number of miles driven in a year on your tax return.

If you’re going through an audit and don’t have odometer readings, look for repair receipts near the beginning and end of the year. The odometer reading will be listed there and it’s possible to extrapolate the numbers.

Mark as many business destinations as you can throughout the year in your appointment book. At year end do a rough calculation to determine what your deductible business usage is.

Log reminders to mark the odometer readings and store that information in your tax files. Do a manual check every quarter of business versus personal usage to establish and substantiate your percent of business usage.

It’s unfortunate that we have to spend so much time keeping these sorts of records, but you will be happy you did if the IRS knocks at your door.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitterat BLTaxpertise and at Facebook