If your job or business requires you to use your own personal car, you may be able to deduct the entire operation costs up to certain limits. If the car is used for both business and personal use, however, you can only deduct costs relating to the business use.

Generally, the amount of deduction is calculated using either the standard mileage deduction or the actual expense method. If you meet the qualifications for both methods, you should consider which one gives you the larger deduction.

The current standard mileage rate can include parking fees and tolls incurred during business use. To use the standard deduction, you have to own (or lease) the vehicle and meet the following requirements:

• You operate less than five vehicles at one time, and are not a fleet operation
• You didn’t claim a depreciation deduction for the car using any method that is not straight line
• You haven’t claimed a Section 179 deduction on the vehicle
• You haven’t claimed special depreciation allowances on the car
• You haven’t claimed actual expenses after 1997 for a car you lease
• You aren’t a rural mail carrier subject to qualified reimbursements

You are required to use the standard mileage rate in the first year you use the car you own for business purposes. In the following years, you can opt for either method. You have to use the standard mileage rate the entire time you lease a car, if you first chose the standard mileage deduction.

The actual expense method requires you to calculate what it truly costs to operate the car during business use. This includes gas, oil, repair, tires, insurance, registration costs, licenses, and depreciation which applies to the total miles driven during business miles.

Other expenses, such as parking fees and tolls are deductible separately, regardless of which method you use to determine your deduction.

Most of the time, the only way you can determine depreciation for cars used after 1986 is the Modified Accelerated Cost Recovery System (MACRS). If you use the standard rate and change methods before the car is fully depreciated, you have to use a straight line depreciation for the rest of the years the car is in service. There are depreciation deduction limits.

As with all deductions, you should have significant proof of all of your expenses.

You can’t deduct expenses reimbursed to you as an employee through an accountable plan, as they should not be added to your wages on your W-2. However, if you get reimbursed through a non-accountable plan, the reimbursements will be included in your wages, and you can deduct the expenses as an itemized deductions.

If you are an employee who wishes to deduct car expenses, you’ll need to complete Form 2106, Employee Business Expenses, or Form 2106-EZ (PDF), Unreimbursed Employee Business Expenses, and itemize your deductions when you file your return. Itemized deductions will be subject to the 2% modified gross income limit. If you are self-employed, deduct car expenses on Form 1040, Schedule C (PDF), Profit or Loss from Business, or Form 1040, Schedule C-EZ, Net Profit from Business, or on Form 1040, Schedule F Profit or Loss from Farming, if you are a farmer.