There are two permitted methods for deducting automobile expenses for employees who are not reimbursed by their employers for the business use of their vehicles:
Actual Method – Actual expenses multiplied by your business use %. Actual expenses include such things as depreciation (if you own the vehicle), or lease expense (if you lease the vehicle), gas, insurance, tolls, registration, repairs and maintenance or…
Standard Mileage Allowance – 50 cents (calendar year 2010) per business mile
Only the business portion of the automobile use is deductible under either method. Business use % is determined by dividing business miles driven for the year by total miles driven for the year. Business miles do not include commuting miles. Commuting miles are considered personal, non-business miles. Commuting includes miles driven from your home to your primary office. No matter what method you use, in order to receive a tax benefit, your total business-related auto expense must exceed 2% of Adjusted Gross Income.
For example, assume your total miles in 2010 = 25,000 miles. Assume you commute to your office 3 days a week or 5,000 miles. Assume you travel to customers/prospects either directly from home or from your main office about 10,000 miles in 2010. Business use would be 10,000 divided by 25,000 or 40%. Assume that your lease is $4,000/year, gas = $2,750 per year, auto insurance = $1,200 per year, tolls = $300 per year, repairs and maintenance = $350 per year. Assume your Adjusted Gross Income on your tax return for 2010 = $150,000.
Now you have two options:
Actual method business auto expense = $3,440 ($8,600 x 40%)
Standard Mileage Allowance business auto expense = $5,000 (10,000 x 50 cents per business mile)
Obviously the standard mileage allow is greater so that is what you will use. Now, in order to get a tax deduction on your return for 2010, this $5,000 must exceed 2% of your Adjusted Gross income, or $3,000 ($150,000 x 2% = $3,000). Since it does you are entitled to a tax deduction of $2,000 ($5,000 less $3,000 = $2,000). This $2,000 goes on Schedule A, as a miscellaneous itemized deduction and is added to all of your other itemized deductions on Schedule A, which reduce the amount of your taxable income for the year.