With the soaring price of gasoline, the deduction for business use of your car is more important than ever. You have two options: Write-off the actual costs related to your business travel, or claim an IRS-fixed standard mileage rate for the number of business miles driven during the year. Assuming you're eligible for either option, use the one that produces the larger deduction.

Standard mileage rate

The standard mileage rate takes the place of tracking costs, such as gas and oil, repairs, and insurance, relieving you of having to keep receipts for every gas purchase and other car-related expense. The standard mileage rate can be used whether you own or lease your car.

The IRS-set rate for 2008 is 50.5 cents per mile for the first half of the year and 58.5 cents per mile for the second half of the year. The IRS increased the rate in mid-2008 in light of ever-higher gasoline costs. Changing the rate during the year is a highly unusual step that the IRS had only done twice before -- in 1999, and again in 2005. However, even the higher rate may not fully reflect your costs.

Whether you deduct actual cost or the standard mileage rate, you can also deduct parking and tolls.

Recordkeeping is critical

You can't deduct any car costs without adequate substantiation. The tax law says that you must make contemporaneous records and dictates exactly what information you have to keep in order to deduct car expenses. Regardless of which method you use -- actual costs or standard mileage rate -- you need to record:

- The date of travel
- The business purpose of travel
- Mileage for each business use (and total miles for the year)

If you use the actual cost method, you'll also need to keep receipts for any relevant expenses. As a practical matter, since you won't know whether the standard mileage rate or actual expense method results in a larger deduction for the year, it's advisable to retain your receipts so you can make an informed choice when you file your return.

Recordkeeping is tedious and time-consuming. Use techniques that help to simplify this chore:

- Rely on software to help automate your recordkeeping. For instance, use software for PDAs (there are commercial and share-ware options available) that enable you to note your mileage electronically and then transfer the information to your computer.
- Use sampling, an IRS-approved method in which you only track your mileage for a representative period of time (say the first three months of the year, or the first week of every month) and then extrapolate mileage for the rest of the year. To use sampling, you must show that the period in which you kept records is representative of travel throughout the year.

Personal travel

Minimal personal use during a business outing in your car does not disqualify the trip. For instance, if you stop for lunch by yourself between business appointments (a personal activity), you can ignore the fact that you stopped; treat the outing as one continuous trip.

No deduction can be claimed for a car used for commuting to and from work. However, if you work from home in an office that qualifies for a deduction (it's your principal place of business), then any business travel to and from your home becomes a deductible business expense.