From the August 2005 issue of Entrepreneur

Are you taking advantage of all the tax benefits available for using a car in your business? With fuel costs going through the roof, now is a good time to review the costs of operating business vehicles and the deductions you receive for their use.

If you use four or fewer vehicles in your business at the same time and are applying the standard mileage rate for these expenses, you may want to consider switching to the "actual car expenses" method that the IRS requires for five or more vehicles used simultaneously. Using the actual expenses method could mean a larger tax deduction, particularly if the vehicles are driven a lot. If you use five or more vehicles at the same time in your business, the IRS requires you to use the actual car expenses method.

The 2005 standard mileage rate for the cost of operating a car, van, pickup or panel truck is 40.5 cents a mile for each business mile. This includes an allowance for depreciation that is not expressed in years. With the actual car expenses method, you calculate the cost of a number of expenses, including depreciation, garage rent, gasoline, insurance, tires, tolls, licenses and registration.

A switch to the actual car expenses method can be made at any time during the year, and is considered in effect for the entire calendar/fiscal year. However, the IRS says you can't switch if you lease a vehicle and have been using the standard mileage rate for that vehicle.

Another way to trim your business vehicle expenses is to purchase gas-electric hybrid vehicles. Hybrids are up to 40 percent more fuel-efficient and reduce emissions by 50 percent compared with conventional vehicles. "Hybrids are growing ever more popular among business owners because of the fuel savings," says Brian P. Wynne, president of the Electric Drive Transportation Association in Washington, DC.

Purchasing a hybrid vehicle also comes with a tax advantage, and this is the year to act if you're thinking about buying one. That's because you can receive a one-time $2,000 deduction for the purchase of a hybrid vehicle placed in service in 2005. Next year, the deduction decreases to $500, and there is no deduction after that. Individual taxpayers also qualify for the deduction.

For more details on the tax side of using a car for business, see IRS Publications 334 and 463, available online at www.irs.gov.