• Business use of a car can mean big tax reductions.Luxury Car sportscar from my luxury car series image by alma_sacra from Fotolia.com
  
  If you're a self-employed person who commutes by car for business purposes, it doesn't take long to realize that associated expenses can add up quickly and put a large, automobile-sized dent in your profits. Thankfully, the IRS realizes that expenses incurred while driving a car in pursuit of a business interest is a legitimate tax deduction. The trick comes in understanding and applying their description of "business use of a car."
  
  

Business Use

• The primary idea to keep in mind is that you can't deduct all expenses associated with driving a car just because you drive it every now and then for self-employment purposes. According to the IRS guidelines, you may only deduct the amount of expenses on a car when it is used for business purposes. In the self-employment world, many entrepreneurs have a single car they use for business and personal reasons. You're going to have to sort it out for the tax man, and this is done by keeping a mileage log -- handwritten is best -- that details the reason for the business trip, as well as the odometer reading at the beginning and end of the trip. That is how the IRS determines which part of the total miles on your car and which percentage of repairs are business-related expenses.
  
  

Actual Cost

• The first method of deducting expenses for your car business use is to deduct the actual dollar amount of all expenses: oil changes, fuel, repairs, car washes and so on. You can also depreciate the purchase of the car by percentage of the time it is used for business. According to NOLO, the actual expense method works out to larger deductions if you drive a newer car used primarily for business. To claim tax deductions, keep all your receipts as proof of the expenditure. If the vehicle is not used entirely for business, record the mileage used for business and for personal uses because, at tax time, the IRS will ask you how many miles were dedicated to each category.
  
  

Standard Deduction

• Depending on your personal situation, it might be easier and provide more deductions to use the IRS standard mileage deduction, which is 50 cents per mile in 2010. The method is simple, but requires good record keeping. Each time you use your car for a business related trip, write down the start and end mileage, as well as the purpose of the trip and total miles traveled. For documentation purposes, the IRS prefers a handwritten journal dedicated solely to keeping your mileage record. In the event they ask you to justify a tax deduction claim, you have excellent proof of your business travel.
  
  

Tax Credit

• Though some of the tax credits for economical cars have been phased out, some are available until December 31, 2010. Certain models of hybrid gas and electric cars are eligible as well as other alternative fuel vehicles. A tax credit reduces dollar-for-dollar the amount of taxes owed for each qualifying vehicle you place on the road before the offer expires. Contact the manufacturer to find out which tax credit vehicles remain. The government is encouraging individuals and businesses to drive more economical cars, and has taken the drastic step of removing money owed directly off your tax bill as incentive.