Standard Mileage Rate

When you use the standard mileage rate, you don’t deduct the actual costs of operating the car, such as gasoline, oil, insurance, repairs, and maintenance. Nor do you claim a deduction for depreciation or lease payments. Instead, the deduction is figured by multiplying the number of business miles you’ve driven by the applicable rate. (Parking and tolls are separately deductible.)

Example. Cecilia drove her car 13,560 miles for business in 2005 — a total of 10,040 miles during the first eight months of the year and 3,520 miles during the last four months. Using the standard mileage rate, Cecilia’s deduction is $5,773, figured by multiplying 10,040 miles by 40.5¢ and 3,520 miles by 48.5¢ and adding the results.

Using the standard mileage rate is simpler because you don’t have to keep records of actual auto expenses. However, you must keep accurate records of your business mileage.

Actual Expenses

With the actual expense method, deductible expenses include gas, oil, repairs, tires, insurance, registration fees, and garage rent. You should keep a detailed log of the expenses (including dates, descriptions, and amounts paid) plus supporting documentation, such as receipts or bills marked “paid,” for expenditures of $75 or more. You also may deduct depreciation.

If you use your auto for both personal and business purposes, you’ll need to keep track of the actual mileage for each purpose. Do this by recording the car’s odometer reading at the beginning and end of the year, and at the beginning and end of each business trip. (Note that commuting between home and office is generally considered personal, not business, use.)

At the end of the year, the business mileage divided by the total mileage determines the percentage of business use. Applying this percentage to the year’s auto expenses produces the tax-deductible amount.

Example. In 2005, Lou drove the car he bought in 2004 13,560 miles for business, the same number of business miles Cecilia drove, and he put a total of 15,953 miles on the car. The business-use percentage for Lou’s car is 85% (13,560 ÷ 15,953). Lou spent $1,732 on gas, $100 on oil changes, $475 on maintenance, and $2,300 on insurance. Lou may deduct 85% of these expenses ($3,916), plus depreciation of $4,080, for a total deduction of $7,996 — about $2,200 more than Cecilia can deduct.

Do a Comparison

If you have appropriate records, you may want to compare your deduction under both methods and use whichever method is more favorable. Unless the car is leased, you can switch from using the standard mileage rate to the actual expense method. But you usually can’t do the reverse. Once you’ve claimed accelerated depreciation for a car under the actual expense method, the IRS won’t let you compute your deduction for the same car using the standard mileage rate.