Winner of the Well Workplace Small Business Award

 

November 26 , 2006 -- I bought a new vehicle for my business last year and chose the standard mileage method to deduct the related expenses for tax purposes. Can you recap the standard mileage method and any new developments for the upcoming tax year?

There is good news for you! The IRS has just announced that it is increasing the mileage rate by 4 cents for 2007. The new mileage rate for owned or leased autos (including vans, pickups or panel trucks) is 48.5¢ for business travel after 2006. That's 4¢ more than the 44.5¢ allowance for 2006 business travel. This increase is due to higher prices for vehicles and fuel.

The standard mileage method is available for owned and leased vehicles but there are conditions that need to be met before using this method. The standard mileage method may not be used for a purchased auto if:

  • It was previously depreciated using a method other than straight-line for its estimated useful life;
  • Code Section 179 expensing deduction was claimed for the auto
  • It was previously depreciated using an accelerated method, such as MACRS
  • The vehicle is used for hire, such as a taxicab

Also, the standard mileage rate can not be used if five or more autos are owned or leased by a taxpayer and used simultaneously, such as in fleet operations.

Otherwise, taxpayers qualifying for both the standard mileage and actual expense deductions may choose the most beneficial method in the year the auto is placed in service. However, the election to use the standard mileage method must generally be made in the first year the auto is placed in service. A taxpayer may then in subsequent years switch to the actual expense method. Additionally, a taxpayer may use the standard mileage method for a leased auto only if that method is used for the entire lease period, including renewals.

Advantages of using standard mileage rate. For those taxpayers eligible to use it, the standard mileage rate offers the following advantages:

  • Mileage rate users need not keep a record of actual expenses, or retain receipts where required. A record of the time, place, business purpose and number of miles traveled suffices.
  • If an auto's business expenses are deducted via the mileage rate, it is not subject to the dollar caps, or the special rules that apply if qualified business use does not exceed 50% of total use.
  • The mileage rate method may yield bigger deductions than the actual expense method for a thrifty, high-mileage model.

Disadvantages of using standard mileage rate. The standard mileage rate offers the following disadvantages:

  • The mileage rate method may produce a smaller deduction than would be obtained by claiming actual business-connected operating expenses plus depreciation (or lease payments). Also, use of the mileage rate method prevents the taxpayer from claiming regular MACRS deductions (subject to the luxury auto dollar caps) for the auto in later years.

Return to Tax Talk.