One area of tax rules that we get most of our questions on is the use of a car – what’s deductible, how it’s calculated, and which is better – buy vs. lease. That being said, let me explain it here for you as a reference. There are two calculations – 1) Standard Mileage Rate Method and 2) Actual Cost – that get performed to determine a deduction for auto use and you take the one that yields that better result:
- Standard Mileage Rate Method. Every year the IRS updates it’s mileage allowance (currently at $.565 per mile for 2013) taking into consideration gas prices, etc. To determine your deduction (or amount to request as reimbursement from your employer) you multiply the business miles by the IRS allowed mileage amount.
- Actual Cost. This method takes the total cost for operating your vehicle – gas, oil, repairs, maintenance, loan interest, car washes, etc. – and multiplies it by the percentage used for business. For example, you drove 10,000 miles during the year, 5,000 of which were for business. Between gas, insurance, maintenance, and all other costs of your car it cost you $7,500. Since 50% of your miles were for business, you would get a deduction of $3,750 ($7,500 x 50%).
Using the example mentioned in the Actual Cost description above, you would choose the Actual Cost method for 2013 since it provides a greater benefit – $3,750 is greater than $2,825 (5,000 miles x $.565 per mile).
As for buy vs. lease, this is a different analysis all together. The premise is the same as the methods above with the difference being depreciation – you depreciate a car that you purchase but NOT a car that you lease. However you include the WHOLE car payment in the deduction for a leased car but only the interest when paying an auto loan (the principle portion is taken care of via depreciation). Due to the ability to take accelerated depreciation, many times the decision to purchase a car wins out but it’s not a certainty.