Cynthia Harelson, CPA, PC

The information in this document is not intended to be all inclusive. If you have questions about a particular situation, please call the office.

DEDUCTING TRANSPORTATION (AUTO) EXPENSES ON YOUR TAX RETURN

AUTO DEDUCTIONS AS A BUSINESS EXPENSE

Transportation expenses, like any other business expense, must be "ordinary and necessary" for your business. The deductions for the following discussion pertain only to business use of a vehicle. For this purpose the definition of vehicle does not include those that by their nature are unlikely to be used much for personal purposes (ie. Ambulances and delivery vans with only a drivers seat).

Traveling from home to work and back again is personal commuting and does not count as business related mileage.

There are two types of deductions methods, the actual cost method, or standard mileage rate method. These are described as follows:

• The actual cost method uses a percentage of your vehicle's operating costs includingfuel, oil, tires, repairs, insurance, parking fees and tolls, licenses, depreciation or lease payments, and interest. The percentage used is calculated from the business miles driven over the total miles driven for the tax year.
• The standard mileage method uses the business miles driven over the year multiplied by a standard mileage rate provided by the government each year.

As long as you used the standard mileage rate in the first year the vehicle is available for use in your business and use straight-line depreciation you can pick and choose which method works best for you each year.

Standard mileage rate is not allowed under the following circumstances:

• The vehicle is used for hire (such as a taxi)
• Five or more cars are used in the same business at the same time (fleet operations)
• If the vehicle was previously leased by you and actual car expenses were claimed.
• If a depreciation method other than straight-line was used, and/or section 179 depreciation was taken previously.

Under the actual cost method a portion of the cost of the vehicle is included in the total deduction each year as depreciation. Under certain conditions the taxpayer may have the option to take an extra amount of that cost in the first year the vehicle is used for business (Section 179 expense). The requirements are the vehicle must be used for business greater than 50% of the total miles, the gross loaded vehicle weight must be greater than 6,000 lbs, and the actual cost method must be elected in the first year and for all years after that. If the business use percentage drops below 50%, or sold prior to the end of the vehicle's depreciation life some of this "up-front" deduction will be reportable as income.

Recordkeeping

Recordkeeping for transportation expenses has a very important role in keeping your returns audit proof. If you deduct transportation expenses you must be able to substantiate your deductions. Appropriate documentation identifies the vehicle and proves ownership. In addition using the actual cost method would also require you to retain all receipts, invoices, and all other documentations to show cost of the vehicle. A mileage log reflecting the who, what, where, when, why, and how many miles of your business related transportation should be kept in an account book, diary, statement of expense or similar record in a timely manner. You should also make a note of the total miles driven for the tax year on your mileage log.

The actual cost method also requires you to keep the receipts for the cost of fuel, oil, tires, repairs, insurance, parking fees and tolls, licenses, and interest.

If you do not have complete records to prove an element of an expense, then you must prove the element with:

• Your own written or oral statement containing specific information about the element, and
• Other supporting evidence that is sufficient to establish the element.

For example, the nature of your work, such as making deliveries, provides circumstantial evidence of the use of your vehicle for business purposes. Invoices of deliveries establish when you used the vehicle for business.

You can keep an adequate record for parts of a tax year and use that record to prove the amount of business use for the entire year. You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year.

AUTO DEDUCTIONS AS EMPLOYEE BUSINESS EXPENSES

Employees who drive their vehicles for work and are not reimbursed by their employer, or are reimbursed at a rate less than the federally allowed rate can claim an itemized deduction on Schedule A of their tax return.

The actual cost method and the standard mileage method as described above are both available to deduct auto expense as employee business expenses.

The recordkeeping requirements are the same as described above.

AUTO DEDUCTIONS AS MEDICAL OR CHARITABLE EXPENSES

Charitable deductions

You can deduct unreimbursed out-of-pocket expenses, such as the cost of gas and oil, that are directly related to the use of your car in giving services to a charitable organization. You cannot deduct general repair and maintenance expenses, depreciation, registration fees, or the costs of tires or insurance.

If you do not want to deduct your actual expenses you can use a standard mileage rate (14 cents per mile for 2008) to figure your contribution.

You can deduct parking fees and tolls, whether you use your actual expenses or the standard mileage rate.

You must keep reliable written records of your car expenses and miles driven for charitable purposes. See the recordkeeping requirements described above.

Medical deductions

You can include in medical expenses amounts paid for transportation primarily for, and essential to, medical care. You can include:

• Bus, taxi, train, or plane fares or ambulance service,
• Transportation expenses of a parent who must go with a child who needs medical care,
• Transportation expenses of a nurse or other person who can give injections, medications, or other treatment required by a patient who is traveling to get medical care and is unable to travel alone, and
• Transportation expenses for regular visits to see a mentally ill dependent, if these visits are recommended as a part of treatment.

You can include out-of-pocket expenses, such as the cost of gas and oil, when you use a car for medical reasons. You cannot include depreciation, insurance and general repair, or maintenance expenses.

If you do not want to use your actual expenses you can use the standard medical mileage rate. (19 and 27 cents per mile in 2008).

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 use the standard mileage rate.

You cannot include in medical expenses the cost of transportation in the following situations:

• Going to and from work, even if your condition requires an unusual means of transportation.
• Travel for purely personal reasons to another city for an operation or other medical care.
• Travel that is merely for the general improvement of one's health.
• The costs of operating a specially equipped car for other than medical reasons.

Ultimately it is the taxpayers responsibility to keep adequate records to substantiate any deductions taken on their return.

The information in this document is not intended to be all inclusive. If you have questions about a particular situation, please call the office.