Business mileage

Method 2

This method takes longer to calculate but is more accurate. If you have had significant repairs done on the vehicle during the year, this calculation will probably yield more expense.

You start the same way as the previous method: by calculating business mileage. In this method, however, you will also need to calculate the total mileage on the vehicle for the year. In keeping with our example, let's say that the vehicle was used on company business for the same 5,000 miles (or kilometers) per year. The total miles (or kilometers) the vehicle was driven is 10,000. The business, therefore, accounts for 50 percent of the vehicle's total usage.

The second step is for you to calculate the actual expenses incurred for the vehicle; for example, fuel, insurance, license fees, repairs, lease costs, or financing interest. Then you simply add up these costs and multiply them by the business-use percentage (which, in the above example, was 50 percent).

A third step involves depreciation on the vehicle. The per-mile or per-kilometer rates in the first method take depreciation into consideration. When you're dealing with actual expenses, you need to calculate the depreciation.

When you first begin using your vehicle for business purposes, you need to assess a rough market value at that point. You do this because, in a sense, you are "selling" the business a portion of your vehicle, even though you are not transferring title. You set up this value as your depreciable value. You then apply the applicable de­preciation percentage against the value to arrive at your total depreciation expense. Then (only one more step, I promise!), you apply the business-use percentage to the total depreciation expense to get the business depreciation expense. I know it sounds complicated, but it's really fairly easy. Here's an example:

Vehicle value at start date of business                $14,000

Business miles (or kilometers)                              2,938

Total miles (or kilometers)                                  12,475

Depreciation rate                                                   30%

Total depreciation:                  $14,000 X 30% = $4,200

Business depreciation: $4,200 X 2,938/12,475 = $989.15

 

Therefore, $989.15 is the amount of depreciation that becomes part of the business vehicle expense.