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 (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.

You can generally figure the amount of your business use of car expense one of two ways: the standard mileage rate method or the actual expense method. If you qualify to use either method, figure the deduction both ways to see which gives you a larger deduction. For 1999, the standard mileage rate is 32.5 cents a mile for all business miles driven before April 1. It is 31 cents a mile after March 31. If you use the standard mileage rate, add any parking fees and tolls incurred for business purposes.

To use the standard mileage rate, you must own or lease 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 depreciation deduction using ACRS or MACRS (discussed later) on the car in an earlier year.

Further, to use the standard mileage rate for a car you own, you must choose to use it in the first year you place the car in service in your business. Then, for a car you own, in later years, you can choose to use the standard mileage rate or actual expenses.

However, for a car you lease, you must use the standard mileage rate method for the entire lease period (beginning after December 31, 1997), and you may not use the actual expense method.

To use the actual expense method, you must determine what it actually cost to operate the car for business purposes. Include gas, oil, repairs, tires, insurance, registration fees, and depreciation (or lease payments) attributable to business miles driven. Also include parking fees and tolls attributable to business use.

Generally, the Modified Accelerated Cost Recovery System (MACRS) is used by car owners to depreciate any car placed in service after 1986. However, if you use the standard mileage rate in the first year and change to the actual expense method in a later year, and before your car is considered fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct. For cars first placed in service in 1999, the

maximum depreciation that you can claim for 1999 is $3,060. For 2000, the maximum depreciation for that car is $5,000, for 2001 it is $2,950, and for each succeeding year it is $1,775. These maximum amounts are different for cars placed in service before 1999. Publication 463, Travel, Entertainment, Gift, and Car Expenses, explains the depreciation limits and discusses special miles applicable to leased cars. Also, the amount of the deduction is reduced if you use the car less than 100% for business. Multiply the maximum amount by your percentage of business use to determine the deductible amount.

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

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

If your employer uses a non-accountable plan to reimburse you for the expenses, the reimbursements should be included in your wages. 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. Your employee business expenses may be deductible as an itemized deduction. For a definition of Accountable and Non-Accountable plans see Publication 463.

If you are an employee, to deduct your car expenses you must complete Form 2106 or Form 2106EZ and itemize your deductions on Schedule A of Form 1040. Your expenses will be subject to the limit on entertainment expenses (if applicable) and the 2% of adjusted gross income limit. See 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.

For more information see Publication 463, Travel, Entertainment Gift and Car Expenses or Publication 17, Your Federal Income Tax, Chapter 28. Publications and forms may be downloaded from this site or ordered by calling 1-800-829-3676.

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