Business owners quite often use the standard mileage rate instead of actual expenses when taking a deduction for the business use of their vehicle. The standard mileage rate is determined annually by the IRS using data from a study conducted by an independent contractor of vehicle-operating expenses based on the prior year’s costs. The operating-expenses include (Rev Proc 2002-61, Sec. 5.04, 2002-39 IRB 616):
- Gasoline,
- Oil,
- Lubrication,
- Repairs,
- Vehicle registration fees,
- Insurance, and
- Straight line depreciation (or lease payments)
What business owners using the standard mileage rate frequently overlook is that parking and tolls, as well as state and local property taxes paid for the vehicle, attributable to business use, may be deducted in addition to the standard mileage rate. However, the taxes do not include sales tax which must be capitalized as part of the cost of the vehicle.
And, regardless of whether the standard mileage rate or actual expense method is used, a self-employed taxpayer may also deduct on their Schedule C the business-use portion of interest paid on an auto loan. However, employees may not deduct consumer loan interest paid on a car loan (however, if an equity loan on the home is used to finance the vehicle, the interest would be deductible home mortgage interest, provided the equity indebtedness limit isn’t exceeded).