If you have more than one car in your household, are you better off if you drive just one for your business or drive two? When it comes to driving deductions, two business cars are usually better than one.
If you use the actual expense method to deduct your business driving, you deduct your actual cost of driving, including gas, maintenance, and deprecation. You might think you would get a larger deduction by using one car 100% of the time for business instead of having two cars that you use less than 100% for business. But this is usually not the case.
Example: Biff owns two cars. He needs to drive 10,000 miles for business during the year and 10,000 miles for personal purposes. Let’s see how big a deduction he gets using one car versus two.
By using two cars instead of one, but driving the same total number of business miles, Biff gets a total $6,660 deduction, compared with a $4,080 deduction for one car.
The reason you come out ahead when you use two cars is that it enables you to deduct a portion of the expenses for the second car that you’d have anyway, even if you didn’t drive it for business, such as insurance. For example, if you use one car for business 90% of the time and spend $1,000 per year for insurance, your deduction will be $900 ($1,000 x 90%). If you use two cars for business 65% of the time and spend $1,000 for insurance on each, your total deduction will be $1,300 (($1,000 x 65% on car 1) + ($1,000 x 65% on car 2) = $1,300).
The IRS requires you to have a good reason for using two cars instead of one for your business. It shouldn’t be hard to come up with one—for example, you don’t want to put too many miles on each car, or one car carries more cargo and the other gets better gas mileage.