Some business people, such as real estate agents and brokers, spend a good deal of time behind the wheel of their car. Indeed, it’s not uncommon for real estate agents to drive over 20,000 miles per year for business. Fortunately, local transportation costs are deductible as business operating expenses if they are ordinary and necessary for your real estate business. Obviously, such expenses are ordinary and necessary for many businesspeople who do their work away from their office. It makes no difference what type of transportation you use to make the local trips—car, SUV, limousine, motorcycle, taxi--or whether the vehicle you use is owned or leased.
If you drive a car, SUV, or van for business, you have two options for deducting your vehicle expenses: You can use the standard mileage rate or you can deduct your actual expenses for gas, depreciation, and other driving costs. Most people use the standard mileage rate because it is simpler and requires less recordkeeping: You only need to keep track of how many business miles you drive, not the actual expenses for your car, such as the amount you pay for gas.
Under the standard mileage rate, you deduct a specified number of cents for every business mile you drive. The IRS sets the standard mileage rate each year. For 2018, the standard mileage rate is 54.5 cents per mile, up from 53.5 cents per mile in 2017. Check the IRS website for the current year's rate. To figure out your deduction, simply multiply your business miles by the applicable standard mileage rate.
Example: Ed drove his car 2,000 miles for his real estate business in 2018. To determine his car expense deduction, he simply multiplies his business mileage (2,000) by the applicable standard mileage rate (54.5 cents).
If you choose the standard mileage rate, you cannot deduct actual car operating expenses—for example, maintenance and repairs, gasoline and its taxes, oil, insurance, and vehicle registration fees. All of these items are factored into the rate set by the IRS. And you can’t deduct the cost of the car through depreciation or Section 179 expensing because the car’s depreciation is also factored into the standard mileage rate (as are lease payments for a leased car).
The only expenses you can deduct (because these costs aren’t included in the standard mileage rate) are:
You must use the standard mileage rate in the first year you use a car for business or you are forever foreclosed from using that method for that car. If you use the standard mileage rate the first year, you can switch to the actual expense method in a later year, and then switch back and forth between the two methods after that, provided the requirements listed below are met. For this reason, if you’re not sure which method you want to use, it’s a good idea to use the standard mileage rate the first year you use the car for business. This leaves all your options open for later years. However, this rule does not apply to leased cars. If you lease your car, you must use the standard mileage rate for the entire lease period if you use it in the first year.
For more information on this and other tax issues, refer to Deduct It!, by Stephen Fishman (Nolo).