If you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation. However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use. If you lease a car for use in your job or business, see Publication 463, Travel, Entertainment, Gift, and Car Expenses, for special rules regarding leased vehicles.

The following rules apply only if you own the car you use in your job or business. You can generally figure your business use of car expense one of two ways: the standard mileage rate method or the actual expense method. For 1998, the standard mileage rate is 32.5 cents a mile for all business miles. If you use the standard mileage rate, add any parking fees and tolls incurred for business purposes. If you qualify to use both methods, figure the deduction both ways to see which gives you a larger deduction.

To use the standard mileage rate, you must own the car; the car must not be used for hire (for example, as a taxi), you must not operate two or more cars at the same time, as in a fleet operation, and you must not have claimed a deduction that included accelerated depreciation on the car in an earlier year.

Further, to use the standard mileage rate, you must choose to use it in the first year you place the car in service in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses. If you use the standard mileage rate in the first year, and change to the actual expense method in a later year, you must use straight-line depreciation over the estimated useful life of the car. You may not use an accelerated depreciation method.

To use the actual expense method of figuring the deduction for business use of a car, you must determine what it actually cost to operate the car. Include gas, oil, repairs, tires, insurance, licenses, garage rent, parking fees, tolls, and depreciation.

Generally, the Modified Accelerated Cost Recovery System (MACRS) is used to depreciate any car placed in service after 1986 and there are limits on how much you can deduct. For cars first placed in service in 1998, the maximum depreciation that you can claim for 1998 is $3,160. For 1999, the maximum depreciation for that car is $5,000, for 2000 it is $2,950, and for each succeeding year it is $1,775. These maximum amounts are different for cars placed in service before 1998. Also, the maximum depreciation amount is less if you use the car less than 100% for business. Publication 463 explains the depreciation deduction for a car, including the limits.

The law requires that you substantiate your expenses by adequate records or by enough evidence to support your own statement. For further information on record keeping, refer to Topic 305.

If you are an employee whose business expenses are fully reimbursed under an accountable plan, the reimbursement should not be included in your wages on your Form W-2, so you do not deduct the expenses.

Your employee business expenses are treated as if they are not reimbursed if your employer uses a non-accountable plan to reimburse you for the expenses. Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a non-accountable plan with your wages, salary, or other compensation and report the total on your Form W-2. For a definition of Accountable and Non-Accountable plans, see Publication 463.

If you are an employee, you must complete Form 2106 or 2106EZ and itemize your deductions on Schedule A of Form 1040, to deduct your car expenses. Your expenses will be subject to the 2% of adjusted gross income limit. Select Topic 508 for information on the 2% limit. If you are self-employed, car expenses are deductible on Schedule C or C-EZ of Form 1040, or on Schedule F of Form 1040 if you are a farmer.

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