Want to deduct your car as a business expense? Here's what you need to know.

People are always wondering whether they can deduct certain items from their taxes — like red wine as a health-related expense (nice try). The most common question: whether they can write off their car as a business expense.

For most, the answer is "no." You generally can't, for example, deduct the cost of your daily commute to the office. And even if you're in, say, sales, and often travel in your car for your employer's business, the deduction usually just isn't all that great (more on that later).

But for those of you who are self-employed or small-business owners, this is, indeed, an option. In fact, you've got two ways to write off your auto expense — a simple one, and a more complicated method that offers greater rewards. So if you're the head of your own small organization, read on. I'm about to explain to you yet another perk of being your own boss.

Standard-Mileage-Rate Method
Let me start off with the easier choice. With the standard-mileage-rate method, all you need to do is keep track of your business miles. You then deduct a certain amount — for 2005 it's 40.5 cents per mile; for 2004 it's 37.5 cents. This figure is intended to compensate you for the fixed and variable costs of owning — or leasing — and operating the vehicle. You're probably spending more than that, but a lot of people pick this method anyway since (unlike the alternative) you don't have to produce a pile of receipts to back up your deduction.

If you select this method, you can claim separate write-offs for parking fees and tolls on your business journeys. You can also separately deduct the business percentage of your vehicle-loan interest and any personal-property taxes on your wheels.

But there are some qualification rules. You can't use the standard-mileage-rate method if:

· You've previously depreciated the vehicle using the depreciation method explained below.
· You use five or more vehicles simultaneously in your business activity during the year.

Actual-Cost Method
If you don't qualify for the standard method, or if you want to save some additional taxes, you should consider the actual-cost method. This is trickier, but it does maximize your deductions in most cases. That's because, based on your business mileage percentage, you can deduct pretty much anything related to the business use of your car, including depreciation, insurance, personal-property taxes, registration and license fees, tires, maintenance, repairs, gas, oil and even trips to the car wash.

But consider yourself warned: You're going to have to keep detailed (and I do mean detailed) records. The best way to do so is by religiously entering all your business miles — along with the date, starting point and destination — into a diary kept in your glove compartment. Also, be sure to keep all receipts and note your beginning and ending odometer readings for the year.

If you do choose to use this method, let us give you a tip on your car selection: You probably don't want to go with one that's going to wildly impress your neighbors and clients. Why? Unfortunately, your friends in Congress have imposed ridiculously low limits on depreciation for most passenger vehicles. So if you put your vehicle into business use in 2005, your maximum depreciation allowance will generally be as follows:

· Year 1: $2,960
· Year 2: $4,800
· Year 3: $2,850
· Year 4: $1,675
· Thereafter: $1,675

As you can see, your car's cost isn't a factor. So you may not live long enough to finish depreciating that new $60,000 BMW. And it gets worse. The above allowances assume 100% business use. So if you use that BMW only 60% for business, your first-year depreciation write-off will be only $1,776 (.60 x $2,960). Time to write your congressman?

SUVs, Pickups and Vans
Mercifully, though, there is an exception. If you buy a "heavy" SUV, pickup or van (as opposed to what the IRS calls a "passenger automobile") and use it over 50% for business, you're entitled to much more generous depreciation allowances.

What exactly is "heavy"? It's a set of wheels with a gross-vehicle-weight rating (GVWR) above 6,000 pounds. SUVs, pickups and vans weighing in above the magic number are considered trucks for tax purposes, and you can generally deduct the following percentages of the business-use part of your "truck's" cost:

· Year 1: 20.00%
· Year 2: 32.00%
· Year 3: 19.20%
· Year 4: 11.52%
· Year 5: 11.52%
· Year 6: 5.76%

Even better: Certain pickups and vans used over 50% for business also qualify for the "Section 179 deduction." This huge break allows you to immediately deduct up to $105,000 of equipment additions during 2005 ($102,000 for 2004, subject to certain limitations). Heavy vehicles that are classified as SUVs are eligible for a reduced Section 179 deduction at $25,000. Bottom line? You can generally write off the entire business-use percentage at the cost in year one. Sweet!

Vehicle Expenses for Employees
As I said, some employees can deduct business-related car expenses, but generally speaking it's no great shakes. That said, if you use your own vehicle on company business because, say, you're an outside salesperson, you can still use the standard-mileage method or the actual-cost method to calculate your deductible expenses.

The problem is, your expenses must exceed the amount reimbursed by your employer. And your itemized deduction will be limited to the amount of unreimbursed expenses in excess of 2% of your adjusted gross income. Under these rules, relatively few employees are actually able to claim any significant write-offs.

Finally, if you receive an employer reimbursement of 40.5 cents a mile or less for your business miles (37.5 cents for 2004), you're allowed to pocket the mileage reimbursement tax-free and blow off any potential deductions. Most employees choose this trade-off in the interest of simplicity.