You can deduct the cost of renting and driving a rental car on your taxes in certain situations. You must keep all receipts for expenses related to the rental car as well as a record of the miles driven for each purpose. The rental car deduction follows the same rules as deducting costs for your own car.
Employees are allowed to deduct car expenses if they were required to use a car for an employer and not reimbursed for the cost. This applies to both the employee's personal vehicle and rental cars. The employee may be required to travel from the workplace to clients' locations or to pick up supplies. Travel between workplaces is also eligible for deduction but not the cost of travelling from the employee's house to the workplace and back. The only exception to this rule is the case where the employee's main place of work for the employer is her home. In that case, she can deduct travel between her home office and the employer's office.
Business owners can deduct the costs of a rental car when it is used for any business purpose except travel between the business owner's home and office. If he has a home office, he can deduct the costs of traveling to and from home as long as the purpose of the trip was business-related. If travel between home and the workplace includes a stop for business purposes, such as making a business bank deposit, the entire trip is deductible.
Other Deductible Situations
You can deduct car expenses in other situations. If you are required to travel for medical care for you, your spouse or dependents, you can claim the cost of transportation, including tolls and parking expenses. If you are moving to start a new job and your new workplace is at least 50 miles farther away from your old home than your old workplace, you can claim a limited amount of transportation costs, including rental cars.
What to Deduct
Subject to the limitations above, as an employee or business owner, you can choose one of two methods of calculating allowable rental car costs: detailed or simplified. The detailed method involves adding up all of the expenses of the rental car, including rental fee, gas, oil, and any repairs and maintenance. Calculate the total miles driven for business purposes and divide that by the total miles driven. Apply this percentage to the actual costs of the rental car to arrive at the business portion. The simplified method allows a deduction of an IRS-mandated mileage rate for all business miles driven. In the last half of 2011, the rate was increased to 55.5 cents per mile. If you are claiming rental car expenses for moving or medical purposes, you can only include gas, oil and the cost of the rental in the detailed calculation. You cannot claim repairs and maintenance, insurance or depreciation. Alternatively, you can claim the simplified rate of 16.5 cents per mile, as of January 2011. The simplified rate is lower for medical and moving expenses than it is for employee and business expenses because fewer expenses are allowable.
Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.