Deducting Auto Expenses & Luxury Auto Limits

When you use a vehicle for business purposes, you can deduct the business portion of the operating expenses on your business. If you use the car for both business and personal purposes, you may deduct only the cost of its business use. You can generally determine the expense for the business use of your car in one of two ways, the standard mileage rate method or the actual expense method.

Standard Mileage Rate Method: The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance, and depreciation (or lease) expenses. For 2003, the standard mileage rate is 36 cents per mile. In addition the cost of business-related parking and tolls is deductible. Caution: If you don’t use the standard mileage rate in the first year the vehicle is placed in service, you cannot use it in future years. If in a subsequent year you switch to the actual method, you must use the straight-line method for depreciation. If the car is leased, you must continue to use the standard mileage rate in future years.

Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible. Both methods can include interest paid on the car loan when deducted on business returns. How ever, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions. Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.” The depreciation deduction for luxury vehicles has a limit which is determined annually. In addition, the special 50% bonus depreciation included in the 2003 tax cut increases the otherwise regular allowable luxury auto depreciation limit by $7,650. The IRS has not yet announced the regular 2003 limits, but the 2002 amount was $3,060. Therefore it is safe to assume the limit for 2003 will be at least $10,710.

Certain sports utility vehicles (a Suburban as example) exceed 6,000 pounds unloaded gross weight and are not subject to luxury limits. With the larger Sec 179 deduction for 2003 through 2005, the entire business portion of the vehicle could be written off in the year of purchase. Of course there are certain limitations that apply, so please call this office for more information on how to maximize your business vehicle deductions.

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