Your shop car or truck can be a tax deduction, but there must be a direct relationship between the use of the vehicle and your business or some income-producing activity.

Turn your shop vehicle into a tax deduction. If you use your car or truck for business-related trips, to deliver food to your favorite charity, or even to drive the kids to the doctor’s office, you can deduct at least some of the costs.

Automobile expenses incurred in your business travel are deductible either as a travel expense or as a transportation expense. (Transportation expenses are deductible only if they’re incurred in a business or investment situation.)

To get the deduction, there must be a direct relationship between the use of the car and your trade, business or some income-producing activity. Examples might be driving to see some property you own or talking with a broker about your investments. If you have one car that you use both for personal and business use, only deduct the portion of your car expenses directly attributable to business use.

The mileage cost basis
In allocating your station car expenses between business and personal use, there are two methods you can use. The first is the mileage cost basis. Using this method, you multiply your business mileage by a standard mileage rate that is set each year by the Internal Revenue Service. For 2008, that rate is 58.5 cents per mile after July 1 plus parking fees, interest, taxes and tolls.

So, for example, if you drive your car 10,000 business miles over the year, you can deduct $4,850, plus all of your business expenses for parking fees, interest, taxes and tolls. You cannot use the mileage cost basis if you use two cars simultaneously in the same business. It is allowable, however, if you use each car for a separate business.

The mileage percentage basis
The second method is the mileage percentage basis. You divide your business-related travel by your total mileage and take that percentage of your total expenses as a deduction. So, for example, if you drove 20,000 total miles over the past year and 15,000 of them were business-related, then 75% of your auto expenses would be deductible.

Included in such auto expenses are any interest, taxes, gas, oil, repairs, washing, registration, license fees and depreciation you incurred. Your business expenses such as parking fees and tolls are 100% deductible and are treated separately from the 75% calculation.

There is a special tax planning strategy that you can use if you have two cars in your family. Assume that you’ve been using one car exclusively for business and the other exclusively for personal family use. You put 36,000 miles each year on your business car and only 12,000 miles a year on your personal car. Typically, you could only deduct the costs of using the business car.

Now suppose you switched the use of each car every six months. The combined mileage of both cars remains 48,000 miles a year. But by rotating your cars equally between business and family use, each car could have 75% of its expenses deducted for tax purposes. Here’s how it works: Both cars are driven 24,000 miles, but 18,000 of those miles are business-related. So instead of only deducting the costs associated with one car, you get to deduct 75% of all of your expenses on both cars. If you’re like most people, that will save you several hundred dollars a year in taxes.