Taxes are your single biggest expense against your income. Knowing what deductions you're entitled to can save you hundreds, if not thousands of dollars. This article will cover vehicle related deductions that often get overlooked by home-based businesses. Our focus will be for individuals with no employees, however many of the deductions will apply to small business and large corporations as well.

There are two ways to calculate Vehicle deductions:

1. Standard mileage for 2006 is $0.445/mile

2. Actual cost method + depreciation

Lets start with the "standard mileage rate". You can write off each mile you drive that is related to your business at $0.445/mile. This is called the "standard mileage rate". So if you drive 10 miles to visit a client, then 10 miles to return to your home office, you can deduct 20 miles. 20x.445=$8.90. However, you cannot deduct all your miles, such as going to the grocery store. You can see how this can add up to a substantial amount. Some professions such as real estate require a lot of driving.

In addition to your standard mileage rate, you can also deduct parking fees and tolls in connection with your business travel. If you have a loan on the car, then you can deduct the interest paid on the loan to the extent that you use the car as a business expense. So if you use your car 50% for business and 50% for personal use, then half the interest paid on the loan is deductible! Remember, this is for self-employed only. You cannot deduct interest on a loan if you are an employee using the car for your job.

The standard mileage rate is by far the simplest, but may not offer you the largest deduction. Instead, you can choose the "Actual Cost Method". In this method, you deduct all the expenses related to owning and maintaining your car. This would include and is not limited to oil changes, repairs, tires, brakes, tune-ups, washing and waxing, auto-club memberships, license plates, and car insurance. Again, all of these expenses are deductible for the portion that you use the car for business. For example, if you drive 20,000 miles during the year, and 15,000 miles are for business, and the remaining miles are for personal use, then you can deduct 15,000/20,000 or 75% of all those expenses.

In addition to the actual cost method, you can deduct a depreciation value. This is a value that reflects the loss of value to the car over time due to wear and tear. The simplest example of this would be if you bought a new car in 2006 for $20,000, you can deduct 20% of the value the first year times the percentage of business use. So if you use the car 75% for business, you calculate your deduction as follows: $20,000x75%x20%=$3000.

For the following years, you use the following schedule:

First year: 20%. (Half a year)

Second year: 32%

Third Year: 19.2%

Fourth Year: 11.52%

Fifth Year: 11.52%

Sixth Year: 5.76% (half a year)

What if you trade an old car you were using for business for a new car? You would have to recalculate a "basis" cost for depreciation. You also have a different depreciation schedule if you use the car less than 50% for business or if you buy a hybrid electric car.

We have by no means covered all the twists and turns that would affect how you calculate your deductions. Fortunately a popular tax software like TurboTax or Taxcut will walk you through each step in calculating your deduction then give you which method yields you the biggest deduction. If you're going to use a tax accounting service, make sure you go over these kinds of deductions with the tax professional. Bring this article with you and ask them if the have experience with how to prepare returns small businesses and all the deductions that are available to you. If they hesitate or stutter, go somewhere else. If could cost you thousands.