Deducting auto expenses.

Taxpayers who use their Cars for business are entitled to tax deductions for auto use, subject to certain rules and limits.

Self-employed taxpayers and employees who either don't get reimbursed or are reimbursed under an employer's plan that doesn't require them to account for their expenses can deduct business auto expenses. For employees, the expenses are deductible only to the extent they exceed 2% of adjusted gross income, a threshold that often makes a deduction impossible.

STANDARD DEDUCTION VERSUS ACTUAL EXPENSES

Taxpayers who use their cars for business have a choice: They can either take the 1994 standard mileage allowance of $.29 per mile or deduct actual business auto use expenses. Actual expenses include depreciation (subject to annual limits), oil, gas, insurance, registration and repairs. Parking fees and tolls can be deducted no matter which method the taxpayer elects.

For some taxpayers, the mileage rate produces a larger deduction, while for others, the actual-expense method may be more beneficial. Under Internal Revenue Code section 280F, annual depreciation deduction limits apply. This means taxpayers who purchase high-priced cars will be subject to limited depreciation deductions, even if the car is used 100% for business.

DEPRECIATION

If business use of a car falls to 50% or less, taxpayers may not claim accelerated depreciation. If business use is between 50% and 100%, taxpayers may claim only a percentage of the available depreciation amount. If business use falls to 50% or less for a particular tax year and the taxpayer had claimed accelerated depreciation in a previous year, a recapture tax must be paid on the accelerated depreciation claimed earlier.

Depreciation headaches can be avoided by claiming the standard mileage deduction, which may, however, understate actual costs, especially if a car is used 100% for business. Taxpayers should choose the standard mileage rate in the first year the car is put in service. They then can switch from the standard mileage method to the actual-expense method in later years--or switch from the actual-expense method to the standard mileage method--but can use only straightline, not accelerated, depreciation (revenue procedure 92-104, 1992-52 IRB 24). The standard mileage method may be more beneficial for taxpayers who have less expensive cars or who travel a large number of business miles.

INCREASING DEDUCTIONS

There are steps taxpayers can take to increase their business auto deductions. One is to keep good records. It will be difficult to decide which of the two methods is more beneficial without complete information on the number of business miles driven and the total amount spent on the car and related expenses.

IRC section 274(d) requires taxpayers to keep travel expense records and to provide information on their tax returns showing business versus personal use. It also is necessary, especially if the actual-expense method is used, to keep receipts for all expenses. If the standard mileage method is used, receipts for tolls and parking should be kept.

Self-employed taxpayers should remember to deduct the interest on any loan to finance the purchase of a business-use car. If the car is used only partly for business, the business percentage of the interest can be deducted; personal interest is no longer deductible.

Whether the actual-expense method or the standard mileage deduction is used, taxpayers should keep a mileage log. The first trip of the day from home to the place of business and the last trip home generally are not counted--these are nondeductible commuting expenses.