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Slam the brakes on standard business mileage deduction

by on
in Small Business Tax,Small Business Tax Deduction Strategies

The IRS recently announced that the standard mileage rate for business drivers in 2010 is just a half a buck for each business mile traveled. (IRS Revenue Procedure 2009-54) That’s a nickel a mile less than the rate allowed in 2009.

Strategy: Switch to the “actual expense” method for this year. Even if you initially started using the standard mileage rate in January, you still can come out ahead if you change your record-keeping habits now.

However, if you started using the actual expense method in the first year the vehicle was placed in service, you generally can’t switch to the standard mileage deduction in subsequent years (e.g., if you claimed accelerated depreciation). Also, if you’ve been using the standard mileage rate for a leased car, you must continue to use that method for the entire lease period.

Here’s the whole story: When you use your own vehicle for business driving, you can deduct your out-of-pocket expenses (e.g., gas, oil, repairs, insurance, etc.) attributable to business driving, as well as a depreciation allowance based on the percentage of business use. Caveat: Depreciation deductions, which are based on a five-year recovery period (six calendar years), may be limited by the tax rules for “luxury cars.”

If you lease a car, you can write off the portion of the lease payments attributable to your business use. The tax law requires you to report an “inclusion amount” reflecting the luxury car limits.

In lieu of deducting your actual expenses, you may claim the IRS-approved standard mileage deduction, plus any business-related tolls and parking fees. The deduction topped out at 58.5 cents per mile for the second half of 2008 before being lowered to 55 cents per mile for 2009. Now it has dropped to 50 cents per mile for 2010. The same rates apply to leased cars.

With the standard mileage deduction, you don’t have to keep track of all your operating expenses, but you still have to document the date, place, business relationship and business purpose of each trip and the mileage.

However, for most business owners, the actual cost of operating a vehicle is higher than 50 cents a mile, so doing a little extra record-keeping work is worth the trouble.

Example: Switch gears on record-keeping

You bought your car a few years ago, drive it almost exclusively on business-related trips and you’ve been using the standard mileage rate. Let’s say you drive 18,000 business miles each year (an average of 1,500 miles a month). In that case, your deduction for 2010 will be $9,000 (18,000 miles x 50 cents).

But suppose you figure out that it costs 65 cents a mile to operate your car. If you switch to the actual expense method on Feb. 1, you can write off $10,725 of your business car expenses (16,500 miles x 65 cents) plus a depreciation allowance. For simplicity, we’ll assume you can write off $3,000 of depreciation this year. (A depreciation adjustment is required when you switch to the actual expense method. See your tax pro for details.) Thus, your total deduction for 2010 is $13,725—a whopping $4,725 more than the deduction allowed under the standard mileage rate!

If it’s possible, you can increase your deduction even further by reconstructing your January expenses. This might add another $975 (1,500 miles x 65 cents) to your 2010 write-off. Just be prepared to prove the expenses if the IRS ever challenges your deduction.

Tip: The tax benefits may be even greater if you use a heavy-duty SUV or pickup for business driving. Some of those vehicles are exempt from the depreciation restrictions for luxury cars.

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