How to Claim Car Expenses on Taxes
Individuals can deduct car expenses on their personal tax return only for the amount of time the car is used for business purposes. When a taxpayer receives reimbursements from his employer, the deduction is reduced by those reimbursements. Car expenses are also subject to a 2-percent limitation imposed by the Internal Revenue Service. This limit further reduces the amount of car expenses that can be deducted. Car expenses are calculated on Form 2106 and then reduced by the 2-percent limit on Schedule A. The IRS only allows individuals to deduct the portion of expenses from Form 2106 that are greater than 2-percent of the taxpayer's income.
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Instructions
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1
Record the information requested about the car on page 2 of Form 2106, lines 11 through 21 to determine the percent of business use for the car. Note that the distance driven for commuting is not included in the determination of business-related driving.
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2
Determine if the standard mileage rate or actual car expenses are more beneficial. Opt to deduct actual car expenses when out-of-pocket expenses for the year exceed the deduction calculated using the standard mileage rate. Complete page 2, Section B to take the standard mileage rate. Multiply the number of miles driven for business by the rate indicated. The standard mileage rate is set annually by the IRS. For 2010 and 2011, the IRS has set the standard mileage rates at $0.50 and $0.51.
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3
Complete page 2, Section C to deduct actual car expenses for the year. Gas, insurance, repairs and license plate costs are deducted on line 23. The actual dollar value of lease payments may need to be decreased if the fair market value of the car on the first day of the lease beginning in 2008 was $18,500 or more. For example, if a Honda with a fair market value of $25,000 was leased in 2010 and monthly lease payments are $389, the lease payment that can be deducted on Form 2106 would be less than the actual payment of $389.
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Multiply the percent of business use calculated on line 14 by line 26. Record the result on line 27. Record current year depreciation on line 28 after completing Section D of Form 2106. Enter the total of lines 27 and 28 on line 29 and on line 1 of Form 2106.
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5
Enter the cost of travel expenses, parking fees and other business expenses on page 1 of Form 2106, Column A, lines 2 through 4. Meal and entertainment expenses are entered in Column B. Record the totals of Columns A and B on line 6.
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6
Enter the total of employer reimbursements on line 7. Record the reimbursements under Column A or B according to the type of reimbursement received. Subtract line 7 from line 6 and record the result on line 8. In the event that employer reimbursements for Column A are more than the taxpayer's out-of-pocket expenses, the extra reimbursements must be reported on line 7 of Form 1040 as income.
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Calculate the car and meal and entertainment expenses to be deducted per line 9, Columns A and B of Form 1040 and record the total on Form 2106 line 10 as well as Schedule A line 21. Include a brief description on line 21, such as "Form 2106"
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8
Determine total miscellaneous deductions and record on Schedule A, line 24. Enter the amount from Form 1040, line 38 on Schedule A, line 25. Multiply line 25 by 2 percent, or 0.02, and record the result on line 26. To determine the IRS 2-percent limitation, subtract line 26 from line 24 and record the result on line 27. According to the IRS, taxpayers are only allowed to deduct miscellaneous expenses that are greater than 2-percent of the taxpayer's income. When Schedule A, line 24 is less than line 26, no deduction is available for miscellaneous expenses such as car expenses.
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