The Actual Cost Method

When you use the actual cost method of determining your vehicle deduction, you must keep track of the actual amount of your costs during the year to calculate your deductible vehicle expenses. The amount of your deduction depends, to a large extent, on how good you are at saving receipts and jotting down your costs throughout the year.

The cost of operating a vehicle includes these expenses:

The cost of the vehicle itself is not a deductible expense, nor is the cost of a replacement, modification, or extensive repair that prolongs the useful life of the vehicle or increases its value. Such costs are capitalized, which means they are added to your basis in the vehicle. These capitalized costs are recovered through depreciation deductions that are taken for a number of years after you place the vehicle in service.

Expenses incurred for the personal use of your vehicle are generally not deductible.

If, like most business owners, you use a vehicle partly for business and partly for personal purposes, you won't be able to deduct all of your actual auto expenses. Instead, you'll need to add up the expenses for the year and deduct a percentage of them that corresponds to your business use percentage of the car.