Expenses for the business use of your vehicle may be deducted by using either the standard mileage rate or by using the actual expenses of owning and operating the automobile.

 

Which one of the 2 methods provides the larger deduction depends on various factors, including the # of miles driven per year, the cost and size of the vehicle, the anticipated repair costs, and the vehicle's gas mileage.

 

IRS does require that you maintain timely a log of the business miles driven.  There are auto logs available that are designed to easily let you do this.  Some business owners do use their best estimates for this calculation, but are at risk, on audit, for having IRS disallow their claimed deduction. Agent's 1st comment is "show me your mileage log".

 

The easiest way to calculate automobile expense deductions is to use the standard mileage rate.  You apply an IRS-determined rate to the business miles driven.  For 2015, the standard mileage rate is .575 cents per mile.   So, if you drive 1,000 business miles monthly in 2015, your automobile expense deduction would be $575.  

 

The standard mileage rate allowance includes all expenses except interest on the vehicle, or parking fees and tolls.  These excepted expenses are deducted in addition to the rate. Deductible interest is the fraction (business miles/total miles) * annual interest paid.

 

The actual expense method requires that you track 4 things -  1/ total miles driven,  2/ business miles driven, 3/ actual operating costs (gas, insurance, repairs, oil, and other maintenance), and 4/ depreciation.  Dividing the sum of actual operating costs and depreciation by the total miles driven gives you actual cost per mile rate.  Multiplying that actual cost per mile rate by business miles driven gives you your automobile expense deduction.  The pro-rata share of auto financing interest is also deductible.

 

Depreciation is the accounting term for allocating the cost of the vehicle over its useful life.  However, for tax purposes, depreciation deductions are significantly limited for passenger autos or a truck, van or SUV with gross vehicle weight of less than 6,000 pounds.

 

e.g. for pickups with gross vehicle weight of less than 6,000 pounds, the annual depreciation over its useful life is:  Year 1 - $3,060, Year 2 - $4,900/  Year 3 - $2,950/ Year 4 and after - $1,775.  An addition $8,000 is also allowed in year 1 under special bonus depreciation rules.

 

Sometimes it's beneficial to compute your expense both ways so that you can decide which method to use.  However, once you choose a method for a specific vehicle, you can only change from standard mileage rate method to the actual cost method.  You cannot change from the actual cost method to the standard mileage rate method.