The IRS recently announced an increase in the standard mileage rate for the second half of 2011. (IRS Announcement 2011-40) So taxpayers might discard all the additional records required to deduct actual driving expenses for a new vehicle and go with the IRS-approved shortcut.
Strategy: Crunch the numbers first. The extra record-keeping rules could pay off in bigger travel deductions at tax return time.
The actual expense method may be especially beneficial this year due to the 100% bonus depreciation tax break for new vehicles used more than 50% for business.
Here’s the whole story: If a taxpayer uses a vehicle for business driving, he or she may deduct out-of-pocket expenditure—including gas, oil, repairs, insurance, registration fees, tires, etc.—attributable to the business use of the vehicle, plus a depreciation allowance based on the percentage of business use. Although depreciation deductions are usually limited by special rules for “luxury cars,” a business driver can effectively add up to $8,000 to the regular limit for a new (not used) vehicle that is placed in service in 2011 and used 100% for business (see box below).
Similarly, if someone leases a vehicle, the lessee can write off the portion of the lease payments attributable to business use. The tax law requires the lessee to report an “inclusion amount” based on the luxury car limits.
Tax shortcut: In lieu of deducting actual expenses, business drivers can claim the standard mileage deduction, which includes a built-in depreciation component. The driver doesn’t have to keep track of all of the operating expenses, but the date, place, business relationship and business purpose of each trip still must be documented.
Initially, the IRS established a flat rate of 51 cents per business mile (plus related parking fees and tolls) for travel in 2011. Then it upped the rate for the last six months of the year to 55.5 cents per mile. The midyear adjustment was made due to higher gas prices.
But don’t assume the standard rate method beats the actual expense method. In fact, it’s often the other way around, even with the latest increase in the standard mileage rate.
Example: Do the math both ways
Jim Monaghan bought a new vehicle in July for $40,000. He drives 1,000 business miles a month and his business use percentage is 80%. For simplicity, let’s assume that the actual costs of operating the car is 75 cents a mile (almost 20 cents a mile higher than the standard mileage rate for the second half of 2011).
If Jim uses the standard mileage rate, his deduction for this vehicle is limited to $3,330 (6,000 miles x 55.5 cents). Conversely, if Jim uses the actual expense method, he can deduct $4,500 (6,000 miles x 75 cents), plus a first-year depreciation allowance of $8,848 (80% of $11,060). The total deduction is $13,348—or more than four times the amount available with the standard mileage rate!
Reminder: Of course, the numbers will vary in any given situation, but you get the general idea.
If you claim deductions for a vehicle placed in service before 2011, certain restrictions may apply. For instance, once a taxpayer claims acceleratedfor a vehicle in a tax year, he or she can’t change back to the standard mileage deduction later.
Tip: Once a taxpayer begins using the standard mileage rate for a leased car, the method can’t be changed during the lease term.
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