Business Use of Vehicles: Standard Mileage vs. Actual Expenses

Vehicle Expenses for Business use

Vehicle expenses are frequently one of the greatest small business tax deductible items. Tax rules for claiming car and truck expense are very tricky. The first thing is to make sure you keep a good records to calculate your vehicle expense deduction. A mileage log is a good example to keep the record. You must back you up to your deduction if you are audited. If your automobile is used for both business and personal use, only the business portion is deductible. You must track the use of use of vehicle and allocate the usage between business and personal use to determine the percentage of each use at the end of year.

Two methods to claim vehicle expense deduction

You have a choice of two method to calculate vehicle expenses for business use: The standard mileage and actual expense methods. which is better? There’s no easy answer. It is a numbers game which depends on a number of factors, some of which are not quantifiable. But before getting into the details, let’s review the basics.

Standard mileage method

First, you may not have the option of using the standard mileage method. The use of the standard mileage method is limited to a self-employed individual or an employee (Rev. Proc. 2006-49). Corporations are not allowed to use the standard mileage rate method. Partners in a partnership are considered self-employed. There are some other restrictions on its use. They’re discussed below. If you do have the option, using the standard mileage method may simplify recordkeeping. There’s no need to keep gas receipts, repair bills, etc. You simply total your business miles for the year and apply the IRS mileage rate in effect. For 2012 the standard mileage rate is 55.5 cents per mile. To determine the number of miles driven for business you need two numbers for each business vehicle:

  • The total number of miles driven during the year
  • The total number of miles driven just for business

Tracking your total mileage for the year is easy. Write down the odometer reading on the day that you start using a vehicle for business and on the day the year ends. Business miles are the number of miles actually driven for business, for example, to visit a customer or meet a client.

Remember that any miles driven to the bank, office supply store, computer store, to meet with your accountant or to meet with your lawyer on business matters also count as part of your mileage deduction.

Some travel is not considered business-related:

  • Driving from your home to your workplace and back is commuting. It’s not deductible on either your business or your individual return.
  • If you stop at the store on the way home from a business trip, the remaining miles from the store to home are considered personal mileage, so you can’t include them.

You cannot use the standard mileage rate if you:

  • you used five or more cars at the same time (as in fleet operations),
  • you previously claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS,
  • You claimed a Section 179 deduction on the car,
  • Claimed the special depreciation allowance on the car,
  • Claimed actual car expenses after 1997 for a car you leased, or
  • Are a rural mail carrier who received a qualified reimbursement.

The “five or more cars” restriction applies to vehicles used at the same time. For example, your business owns three vans and two cars. The three vans can be on the road together at the same time, but you’re the only one who drives the cars, so only one will ever be in use at any time. You won’t break the four car maximum.

What Can You Deduct Using the Standard Mileage Method?

We mentioned the 55.5 cents per mile for 2012. That includes most of the cost of operating the car–depreciation or lease payment, insurance, license and registration, property tax, repairs, gas, oil, etc. If you chose the standard mileage method for claiming auto expenses, you can’t take a depreciation deduction on the vehicle. However, you can still deduct tolls, parking expenses (but fees to park your car at your place of work are nondeductible commuting expenses) as well as interest on an auto loan if you can deduct.

Actual Expense Method

If you’re using the actual expense method you can deduct all the expenses of operating the vehicle. Here’s a list of auto-related expenses you might incur.

  • Gas and oil
  • Maintenance and repairs
  • Tires
  • Registration fees and taxes*
  • Licenses
  • Vehicle loan interest*
  • Insurance
  • Rental or lease payments
  • Depreciation
  • Garage rent

But you’ll have to maintain records and keep the receipts of all the expenses. If you lost the receipts for those gas expenses, the IRS will disallow the expenses. If you’re audited there’s a very high probability the IRS will ask for your car logs, expense documentation, etc. for all business vehicles. Agents know most taxpayers are lax in this area and most of the time an agent is almost guaranteed to disallow some deductions.

You can only deduct the portion of the expenses incurred for business use based on the percentage of mileage used for business. For example, you drive your SUV 10,000 miles during the year. Only 6,000 of those miles were for business. You can only deduct 60% of the expenses.

Picking the Best Method

We’d like to be able to tell you there’s one an easy rule of thumb to selecting the best method: Generally, the more economical the vehicle is to operate, the more likely it is that the standard mileage rate will give you the bigger deduction. Conversely, the higher the operating costs, e.g., gas, repairs, tires, etc. the more beneficial the actual cost method is likely to be.

There are some general guidelines that can be used in extreme cases. First, the cost of the car may make little difference, except when it comes to repairs, insurance, etc. That’s because there are limits on the depreciation or Section 179 expense option–generally about $3,000 in the first year, $4,900 in the second, $3,000 in the third and $1,800 in subsequent years. For 2011 the allowable deduction for the first year is $11,060 for autos if you’re using the bonus depreciation. (The higher, $11,060, amount is a result of the current stimulus program and may not be repeated. Go to our Vehicle Tables and click on Depreciation Limits for the year the vehicle is placed in service.) Thus, the depreciation for a car costing about $16,000 will be the same for one costing $100,000, at least for the first few years. On the other hand, a $100,000 auto is likely to incur far higher insurance premiums and repair costs.

Since depreciation, insurance, leasing costs, and interest are pretty much fixed costs, the less you drive, the more likely you’ll come out ahead with the actual cost method. For example, if those fixed costs amount to $6,000 per year and you drive 10,000 miles, the cost per mile (ignoring fuel and repairs) would be $0.60 per mile. Drive only 1,000 miles per year and the cost is $6.00 per mile. In both cases that’s more than the $0.555 per mile allowed for 2012. On the other hand, if you drive 20,000 miles per year, the fixed costs drop to $0.25 per mile–less than the standard mileage rate, even after accounting for fuel.

Thus, before doing any detailed calculations, estimate your total business miles during the year, say 6,000. (In most cases even rough numbers will be sufficient. The numbers often clearly tip one way or the other.) Then multiply by the IRS standard mileage rate. Use $0.555 for 2012. The deduction would be $3,330. Next, figure your actual costs by adding your depreciation or lease payments, insurance and repairs. (If you qualify for bonus depreciation, spread the first-year amount over several years to make comparisons more realistic.) Assume that totals $5,500. Multiply by your business usage percentage. Assume 80% here. That’s $4,400, before adding in fuel costs. Clearly, the actual cost method will provide the greater deduction.

But there are many situations where you could come out ahead with the standard mileage–an inexpensive car, like one from a Toyota Dealership Plano, that gets high mileage coupled with high annual business miles. For example a $23,000 car that gets 35 miles on the highway and $1,500 insurance premium driven 30,000 miles. The standard mileage deduction would be $16,650, far in excess of what you’d be able to deduct using actual expenses.

Note: Once actual depreciation has been claimed on a vehicle, the standard mileage rate cannot be used for that vehicle. So if you switch from the standard mileage rate to actual, a switch back to the standard mileage rate is not permitted. Similarly, if you claim the actual method when you start using this vehicle for business, the standard mileage rate can never be used for that vehicle.

Self-Employed Owner (Sole Proprietor)

If  you do business as a sole proprietorship or you are a single-member LLC and file a Schedule C with your personal tax return (Form 1040), you can choose to use either the actual expense method or the standard mileage rate method subject to the rules outlined above.  If you are considered a self-employed owner for tax purposes, you can deduct that part of the interest that reflects the business use of the car. For example, based on the miles driven during the year, you use your car for your sole proprietorship 70% of the time. You can deduct 70% of the interest for the year on your Schedule C. If you itemize, you can deduct the business part of personal property taxes on Schedule C and the remaining portion on Schedule A.

S Corporation/C Corporation

A vehicle used for business may be owned by the corporation or by an employee (even a shareholder employee). The method of claiming the deduction will differ depending on the ownership of the vehicle.

Vehicle Owned by Employee

An employee (or a shareholder employee) who uses a personal vehicle for business can submit a request for reimbursement to the corporation, based on documented business miles. The corporation can then reimburse the employee based on the standard mileage rate for business. In this case, the corporation gets a deduction for vehicle expenses paid, and the reimbursement is not reportable as taxable income to the employee. If the company paid the auto loan, insurance, gas. repair, etc to the owners, these payments would not be deemed as valid business expenses. They will be treated as the auto allowance or distribution if to shareholder-employees.

If the employee has to pay his or her own expenses on behalf of the corporation without reimbursement, the employee claims an unreimbursed employee business expense deduction as a miscellaneous itemized deduction on Schedule A of Form 1040. The employee can use the actual method or standard mileage method to calculate the deductible amount.

Often times,  the shareholder may take depreciation and vehicle payments corporately without actually showing a vehicle on the books. In this case it is shareholder loan or distribution for the payments and no depreciation is allowable by the corporation.

Vehicle Owned by the Corporation

A corporations is not allowed to use the standard mileage rate method and so must determine the deduction for vehicles it owns based on actual operating expenses.  the corporation can deduct auto loan, interest, insurance, repair, gas etc. However, the deduction is also limited by the business-use percentage of the vehicle. The corporation corporation can treat vehicles used by employees as being used 100% for business purposes and gets to deduct 100% of the auto expenses.  If an employer provides an employee with unrestricted use of a vehicle, the value attributable to the employee’s personal use of the vehicle is required to be included in the employee’s gross income. The value of the personal use portion of the employer-provided vehicle is determined by using the Annual Lease Value Table published in at Treas. Regulation.  The employer must withhold the appropriate taxes from the employees’ wages. This is typically the case when you get the use of a company car as an employee benefit. The corporation’s deduction for the personal-use percentage is treated as a compensation expense.

Note: The employee’s income for personal use of a corporate vehicle is determined based on the market value of the vehicle, not on the actual expenses or standard mileage rate, for example, the cost to rent a vehicle.

Partnership/LLC

The rules are the same as an S Corporation, with one exception: A partner/member who has unreimbursed auto expenses as a requirement of the partnership/LLC agreement can claim the deduction on Schedule E of Form 1040 rather than on Schedule A.

Buy or lease?

The standard mileage rate can also be used for a leased vehicle. If you use the standard mileage rate, you cannot switch to the actual expense method in a later year.

If you use the standard mileage rate for a leased vehicle, the lease payment amount is not deductible.

Leased vehicles are not depreciated. Instead, the business portion of the lease payment is deducted. When the value of the leased vehicle is above a certain amount, you must also subtract an “income inclusion” amount from the deductible amount. For vehicles first leased in 2012, the threshold is $18,500. This income inclusion rule is an attempt to equalize the tax benefits from leasing and owning business vehicles.

For example, a vehicle leased in 2012 that is valued at $45,500 and that is used 100% for business would require an income inclusion amount of $17 to be subtracted from the 2012 lease payments in arriving at the deductible amount for that year. In 2013, the income inclusion amount would be $37. Higher income inclusion amounts would apply for 2014 through 2016.

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