The Actual Cost Method

When you use the actual cost method of determining your vehicle deduction, you must keep track of the actual amount of your costs during the year to calculate your deductible vehicle expenses. The amount of your deduction depends, to a large extent, on how good you are at saving receipts and jotting down your costs throughout the year.

The cost of operating a vehicle includes these expenses:

• cleaning, inside and out; waxing
• depreciation, if you own the vehicle
• gas and oil
• insurance
• interest on a vehicle loan
• lease payments, if you lease the vehicle
• license fees, if substantially based on the value of the vehicle
• motor club membership
• parking and garage rental
• personal property taxes
• repairs and maintenance
• tires and supplies
• tolls

The cost of the vehicle itself is not a deductible expense, nor is the cost of a replacement, modification, or extensive repair that prolongs the useful life of the vehicle or increases its value. Such costs are capitalized, which means they are added to your basis in the vehicle. These capitalized costs are recovered through depreciation deductions that are taken for a number of years after you place the vehicle in service.

While it is true that the cost of a vehicle is not a "deductible business expense," the expensing election under Code Sec. 179 and bonus depreciation may enable you to "write off" a big chunk of that purchase price the first year. The amount you can deduct depends upon the type of vehicle and when you purchased it, among other factors. Consult IRS Publication 463 (2012), Travel, Entertainment, Gift, and Car Expenses for more information.

Expenses incurred for the personal use of your vehicle are generally not deductible.

If, like most business owners, you use a vehicle partly for business and partly for personal purposes, you won't be able to deduct all of your actual auto expenses. Instead, you'll need to add up the expenses for the year and deduct a percentage of them that corresponds to your business use percentage of the car.