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Squeeze more tax mileage from driving

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in Small Business Tax

Due to plummeting gas prices, the IRS has lowered the standard mileage rate for business drivers in 2016. (IRS Internal News Release IR-2015-137, 12/17/15)

Strategy: Switch to the actual expense method. It is often preferable to the standard mileage rate even though it requires more recordkeeping.

The actual expense method can be especially beneficial if you qualify for “bonus depreciation” for a new vehicle used for business and placed in service in 2016.

Here’s the whole story: When you use a vehicle for business driving, you can deduct out-of-pocket expenditures—such as gas, oil, repairs, insurance, registration fees, tires, etc.—attributable to the business use of the vehicle, plus a depreciation allowance based on business use. Similarly, you can take a deduction for a leased vehicle.

In lieu of writing off actual expenses, however, business drivers can claim the standard mileage deduction, which includes a built-in depreciation component. This way, you don’t have to keep track of all your actual operating expenses, but you still must document the date, place, business relationship and business purpose of each trip.

The standard mileage rate method is easier to use, but the actual expense method often produces a bigger deduction. Now that the IRS has dropped the standard rate for 2016 to 54 cents per business mile plus business-related tolls and parking fees (down from 57.5 cents in 2015), there’s even more of a tax reason to switch.    

Example: Normally, you drive 12,000 business miles a year. Let’s say your depreciation allowance would be $4,500 and your actual operating expenses work out to 50 cents per mile.

If you use the standard mileage rate, your deduction is limited to $6,480 in 2016 (12,000 miles x 54 cents per mile). Conversely, with the actual expense method, you can deduct $10,500 (50 cents x 12,000 miles + $4,500 depreciation) if you have the proper records. That’s $4,020 higher, even though the actual cost per mile (ignoring depreciation) is still lower than the standard mileage rate.

While depreciation deductions are generally limited by rules for “luxury cars,” the 50% bonus depreciation deduction, which was recently restored by Congress, can add up to $8,000 to the depreciation write-off for a new (not used) vehicle placed in service in 2016.

Tip: Once you begin using the standard mileage rate for a leased car, you can’t change during the lease term.

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