The costs associated with purchasing a new vehicle can seem daunting. However, if you are employed and use the vehicle for business purposes, you may be able to write off, or deduct as an expense, some of those costs on your personal tax return. The key factor is that you must have a valid business purpose for the vehicle other than commuting to and from work. Maintain a daily log of miles driven for business purposes to substantiate the business purpose of your vehicle. You cannot deduct out-of-pocket expenses that are reimbursed by the employer.
Write your name (or the taxpayer's) and Social Security number at the top of Form 2106. Also include the occupation in which the vehicle expenses were incurred. The occupation should match the occupation stated on page 2 of Form 1040 where the your (or the taxpayer's) occupation is requested next to the signature.
Record the date the vehicle was placed in service on page 2, Part II of Form 2106. This should be the date the vehicle was purchased. If the vehicle was purchased but only used for personal travel, record the date the vehicle was first used for business purposes.
Complete the information requested in Part II to determine the percent of business use. Note that commuting miles are deducted from total business miles driven on line 16.
Indicate if you have evidence to substantiate the business use of the vehicle on line 20. If the evidence is written, indicate so on line 21. The written evidence may be a daily log of miles driven for work or a day planner indicating meetings for work and their locations.
Record the total annual cost of gasoline, oil, repairs, insurance and similar costs on line 23 of Form 2106. Do not include the interest portion of any vehicle loans. Per the IRS, the interest portion of personal loans, with the exception of home mortgages, is not allowed to be deducted.
Multiply total vehicle expenses per line 26 by the percent of time the vehicle is used for business purposes per line 14. Enter the result on line 27. This is the portion of vehicle expenses that are allowed to be deducted on the tax return.
Calculate the vehicle's depreciation. Record the purchase price of the vehicle on line 30. Multiply line 30 by the percent of time the vehicle is used for business purposes per line 14 and record the result on line 32. Using the method of depreciation chosen for the vehicle per Form 2106 instructions, calculate the depreciation for the current year and record the result on line 34. Record the result on lines 38 and 28 of Form 2106.
Calculate total deductible vehicle expenses on line 29 and record the result on line 1 of Form 2106. Complete lines 2 through 5 for any additional unreimbursed business expenses and enter the total on line 6.
Record employer reimbursements for expenses on line 7 of Form 2106. Subtract line 7 from line 6 to determine if you have received reimbursements for expenses from your employer in excess of actual business expenses. If the result is greater than line 6, record the income on line 7 of Form 1040.
Complete lines 9 and 10. Record the resulting number from line 10 on Schedule A, line 21.
Determine the portion of vehicle and other unreimbursed employee expenses that can be deducted on Schedule A. Add all miscellaneous deductions from lines 21 through 23 on Schedule A and enter the result on line 24. Record your adjusted gross income from line 38 of Form 1040 on Schedule A line 25. Multiply line 25 by 2 percent to calculate the IRS-imposed limitation on deductible expenses. Subtract line 26 from line 24 and enter the result on line 27. If the resulting number is greater than zero, you can deduct that portion of miscellaneous expenses, including vehicle expenses.
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