Many people do not take full advantage of deductions for their vehicles, and many times it’s because they don’t know what they are allowed to deduct.

Vehicle expenses paid exclusively for rental activity can be fully deductible. Using the actual expense method instead of the standard mileage rate might be more beneficial if your vehicle incurred a lot of expenses during the year.

Usually the largest actual vehicle expense that you can deduct is depreciation, which allows you to deduct the value of your vehicle over a period of 5 years.

Many times, depreciation is the factor that determines which expense method will be used. For example, a person who used a $25,000 vehicle and drove 10,000 business miles would want to use the actual expense method so they could take advantage of a $5,000 depreciation deduction ($25K/5years = $5K yearly deduction).

However, a person with a $20,000 car who drove 10,000 miles would benefit more from the standard mileage deduction of $4,850 over a depreciation deduction of $4,000 (10,000 miles * $0.485 per mile = $4,850 standard deduction).

Other deductible costs include car insurance, DMV registration fees, tolls, parking, gas, oil changes, tune-ups, tires, maintenance, etc… When deducting actual vehicle expenses, it is very important to keep a track of costs and receipts. If you do not use the vehicle solely for rental activity, then you should keep a record of mileage traveled for your business, so you can deduct a percentage of the vehicle's actual expenses.

Whether using the standard mileage or actual expense deduction, be sure to record all expenses related to your rental activity. You usually won’t know which deduction method to use, so it’s best to just keep a journal of all vehicle activities.

I have not discussed the specific rules about listed property, depreciation limits (which change often), and switching accounting methods, so you should consult with a tax advisor to be sure about your situation. I just wanted to provide everyone with an overall understanding.

I hope this explanation was easy to understand and that it can be helpful for you or your clients. To learn more about which auto and travel expenses you can deduct from your Schedule E, take a look atthese tips.