CARL WATTS & ASSOCIATES

March 11, 2013

www.carlwatts.com
office@carlwatts.com
Washington DC
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Everybody’s got something to say about cars, or vehicles, or automobiles, it feels like a blessing to only have to write about car related tax deductions. Whether you’re inclined to judge the costs of car usage against the cost of the alternatives, or the social benefits against the air pollution impact, those of you who use vehicles should know what tax deductions are there to be claimed.

In one of our recent newsletters on tax incentives for going green, we detailed the most important information on the tax credits for new eco-friendly vehicles, alternative fuel and commuters.

This newsletter is about deducting the cost of operating your car. Not everybody qualifies to take a car expense deduction, but you may be entitled to if you drive your car for:

1. Business purposes,
2. Medical care,
3. Moving or relocating, or
4. Charitable services.

If you use your vehicle (car or truck) to run your business, all the associated costs of owning a vehicle: fuel, oil, insurance, repairs, maintenance, depreciation, loan interest, are permissible tax deductions. Lease payments can also be included if you lease rather than own the vehicle.

Employees can also use their vehicles for business and receive reimbursement from the business or deduct these expenses from their own income on their personal tax return.

Business use of your car can mean driving from your place of employment to another work site, to meet with a client, or going to a business meeting; travel to and from temporary work locations is considered a deductible expense also (a temporary work location should be limited to jobs that you don't reasonably expect to last more than one year). Transportation from a first job to a second job is also a qualified deductible expense.

If you don't have a regular place of work and travel as a part of your normal duties, then your travel expenses within your metropolitan area are not deductible.
However, if you need to travel outside your metropolitan area for business, then the mileage is deductible.


Parking fees associated with visiting clients are also qualified deductions.


If you are self-employed and have a home office, then your home can be considered your primary place of business and any travel to another location to work can be qualified as deductible under the travel expense rule that applies to traveling between places of work.

Commuting from your home to the office doesn't count as a business purpose.


There are two methods used to determine the total costs for the business use of your car: the standard mileage and the actual cost method.

The standard mileage method uses a rate that is determined each year by the IRS and is subject to change. You have to multiply the business miles by this rate to get the deductible cost. For 2012 the IRS mileage rate is 55.5 cents per business mile driven, and for 2013 it is 56.5 cents per mile.

For the actual cost method, you have to total all associated costs of operating the vehicle and determine an allocation for business use.

Total business miles divided by total miles driven will give you a percent of business use. Multiply this percentage by the total costs to determine the deduction to claim.

Obviously, you should use the method that brings the highest deduction for your case.

Both as an employee or a business owner, you need to keep mileage records to prove the personal and business use of the vehicle.

If you take the standard deduction you will need to track miles and if you choose to deduct actual vehicle expenses, you will also need to track other items, such as gas, repairs, insurance, and registration.

If self-employed, you have to report vehicle expenses on Schedule C.

As an employee, you must report vehicle expenses on Form 2106 for Employee Business Expenses. This deduction is a miscellaneous itemized deduction, subject to the 2% of adjusted gross income limit. That means, unreimbursed employee expenses are deductible, but you don't get a full dollar-for-dollar deduction on your tax return.

You can deduct the use of your car as a medical expense if you used it as transportation primarily for and essential to medical care for you and your dependents.

You can include out-of-pocket expenses, such as the cost of gas and oil. You cannot include depreciation, insurance, general repair, or maintenance expenses.

You can also include parking fees and tolls. You can add these fees and tolls to your medical expenses whether you use actual expenses or the standard mileage rate.

The deduction is taken on your Schedule A as part of your medical expenses and is subject to a threshold of 7.5% of your AGI in 2012, which is increased to 10% of AGI in 2013.


If you need to relocate to a new residence which is at least 50 miles farther from your old home than the distance between your old home and your old job, then you can deduct the cost of driving your car while moving. This deduction is taken on Form 3903.

The standard mileage rates for medical or moving purposes for 2012 is 23 cents per mile and 24 cents per mile for 2013.

You can deduct car expenses if you use your car in providing services to a charitable organization, such as volunteer services for a church, charity or hospital.

For 2012 and 2013 the IRS mileage rate is 14 cents per mile for charitable service.

This deduction is taken on your Schedule A as part of your charitable donations if, of course, you itemize deductions.

You can also claim a deduction if you donate a car or other vehicle to a qualified charitable organization.

If the vehicle is sold by the charitable organization, the deduction you claim usually may not exceed the gross proceeds from the sale.

If you claim at least $250 but not more than $500 as the value of your vehicle, you must obtain written acknowledgement of the donation from the organization.

If your deduction is more than $500, the written acknowledgment or Tax Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, must be attached to your return. The acknowledgment must include your name and taxpayer identification number, the date of the contribution, the vehicle identification number, gross proceeds of the sale, and a statement certifying the vehicle was sold in an arm's length transaction between unrelated parties.

In addition, for deductions greater than $500 but not more than $5,000, you must complete Section A of Tax Form 8283, Non-cash Charitable Contributions, and attach it to your Tax Form 1040.

If the deduction is greater than $5,000, you must complete the Section B of Tax Form 8283, which must include the signature of an authorized official of the non-profit. If the deduction is of $5,000 but not limited to the gross proceeds from the sale of your vehicle, you must get a written appraisal of your vehicle from a qualified appraiser.

Deducting car expenses may mean a large savings in your tax bill so it is always worthwhile to enroll professional help to guide you with all the calculations, documentation and annual IRS updates on all kinds of regulations.

Car Related Tax Deductions
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