43.2 Expense Allocations

If you do not claim the IRS mileage allowance, you may deduct car, truck, or van expenses on business trips such as the cost of gas and oil (including state and local taxes), repairs, parking, and tolls.

If you use your vehicle exclusively for business, all of your operating expenses are deductible. However, if you are an employee, the deduction is limited by the 2% adjusted gross income (AGI) floor (19.1).

Apportioning vehicle expenses between business and personal use.

For a vehicle used for business and personal purposes, deduct only the depreciation and expenses allocated to your business use of the vehicle (43.3–43.5).

The business portion of vehicle expenses is determined by the percentage of mileage driven on business trips during the year.

EXAMPLE

In 2012, you drove your car 15,000 miles. Of this, 12,000 miles was on business trips. The percentage of business use is 80%:

Your actual car expenses (gas, oil, repairs, etc.) for the year were $1,000, of which $800 ($1,000 × 80%) is deductible. If you are an employee, the $800 is only deductible as a miscellaneous itemized deduction subject to the 2% AGI floor (19.1).

---

Interest on vehicle loan.

If you are an employee, all of the interest is considered personal interest and is not deductible even if you use the vehicle 100% of the time for your job. If you are self-employed, the allocated business percentage of the interest is fully deductible on Schedule C; the personal percentage is not deductible.

Taxes paid on your car.

The business portion of sales taxes paid on your vehicle is not deductible whether you are an employee or self-employed; the tax is added to the basis of the vehicle for depreciation purposes (43.3).

State and local personal property taxes are deductible as itemized deductions on Schedule A if you are an employee. If you are self-employed, deduct the business portion of the personal property taxes on Schedule C and the personal percentage on Schedule A if you itemize.

Leased vehicle.

If you lease a car, truck, or van for business use and do not claim the IRS mileage allowance (43.1), you deduct the lease payments plus other costs of operating the vehicle. If the vehicle is also used for personal driving, the lease payments must be allocated between business and personal mileage. The rules requiring the reporting of extra income attributable to the lease are discussed later in this chapter (43.12).