The IRS Laws Concerning Business-Owned Vehicles

The IRS Laws Concerning Business-Owned Vehicles
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Whether your business runs a fleet of delivery vans or uses a single company-owned car on occasion, you will have expenses and deductions to report on a business return. Vehicle expenses are an important component of your business financials, and are essential to keep track of for tax purposes.

Business Purposes

To claim any vehicle expenses as a tax deduction, you must use the vehicle for business purposes. If you or anyone else in your company travels in a company car for personal use, you will have to calculate the percentage of time the vehicle is "on the clock" for the business. This means keeping a log of miles driven and the purpose of each trip. The IRS will ask for these records if it questions a deduction or audits your tax return.

Actual Expenses vs. Mileage

When claiming expenses, you can deduct the actual costs of the vehicle or just take a standard mileage rate. Actual costs would mean purchase price, fuel, repairs, registration fees and tax, license fees and insurance -- any expenses for the vehicle, other than interest on the loan you used to buy it. You can deduct parking charges and tolls separately from vehicle expenses. Standard mileage is just a flat rate multiplied by the number of miles driven; for tax year 2012, the rate reached $0.555 a mile. Again, you allocate business and personal use of the vehicle for either method. In addition, you can't use the standard mileage rate if you're running a fleet of five or more vehicles, if you didn't use the standard rate in the first year of operation; or if you claim depreciation of the vehicle by any method other than straight-line depreciation.


Depreciation means deducting a portion of the cost of your property to account for a decline in its value. There are various methods of depreciating property. Under Section 179 of the IRS code, you can depreciate the entire cost in the year you purchased the vehicle. With straight-line depreciation -- the simplest of four other accepted methods -- you deduct the cost amount over the scrap value for a fixed number of years, representing the vehicle's useful life. If you pay $10,000 for a car that you can use for four years and can scrap for $2,000, you would depreciate a total of $8,000 or $2,000 a year.

Employee Use

You deduct vehicle expenses on Schedule C, Profit or Loss From Business. If your employees use their vehicles for company business, they can take a deduction for business-related expenses on Schedule A of their individual tax returns. They can elect the actual expense or standard-rate method, and can't deduct any expenses that the business reimbursed. They must itemize deductions to write off these unreimbursed employee expenses; they can't take the standard deduction as well as the vehicle expense deduction. In addition, the IRS only allows the deduction of that portion of expenses that are more than 2 percent of the taxpayer's adjusted gross income.