Standard Mileage Rate for Deducting Car and Truck Expenses
When a motor vehicle is 1st put in service for business, expenses can be deducted using either the standard mileage rate or actual operating costs of the motor vehicle, including depreciation on the vehicle. The standard mileage rate can be applied to cars, vans, pickup trucks, or panel trucks. However, motorcycles, scooters, or bicycles require deducting actual expenses, since the IRS considers the standard mileage rate to be too generous for these fuel-efficient vehicles — especially bicycles! Travel expenses for getting medical services or for moving or to provide charitable services are also deductible, but at a lower rate.
The standard mileage rate is based on annual studies, which are currently being done by Runzheimer International, on the variable and fixed costs of operating a motor vehicle. The studies determine the standard mileage rate for business, medical, and moving expenses. However, the $.14 rate established for travel for charitable purposes is set by statute, so it does not usually change year to year.
When considering which method to choose, you should consider the fuel efficiency of the vehicle and how it will be used in business. If you use a fuel-efficient car, the standard mileage rate may yield greater tax savings. If the choice is made to claim actual operating costs and depreciation, then the standard mileage rate cannot be used at any time for that vehicle. However, if the standard mileage rate is chosen in the 1st year, then the taxpayer can still decide to deduct operating costs and depreciation in later years. However, MACRS depreciation and first-year expensing can only be used if the deduction of actual operating expenses is chosen in the 1st year. If a switch is made to claim actual expenses from the standard mileage rate, then straight-line depreciation must be used for the remaining estimated useful life of the vehicle if it is not already fully depreciated.
The standard mileage rate includes coverage for the operating cost of the vehicle plus depreciation. In addition to the standard mileage rate, other variable expenses are also deductible, regardless of the method used to claim expenses for the vehicle, such as:
- parking fees and tolls that are paid during business trips;
- the business-use percentage of
- interest on loans to buy the vehicle;
- value-added taxes assessed on the vehicle purchase.
One advantage of the standard mileage rate over claiming actual expenses is that if the taxpayer uses more than 1 vehicle, then the deduction is easily calculated by simply totaling the total number of miles in each vehicle. However, the standard mileage rate cannot be claimed for fleet operations where 5 or more vehicles are used in the business or for vehicles used as a taxicab. The mileage rate can be claimed for leased vehicles, but if it is chosen, then it must be used for the entire lease period, including renewals.
The mileage rate already includes deemed depreciation, so the taxpayer must reduce the basis of the vehicle by the amount of depreciation that is accounted for by part of the mileage rate. If a switch is made later on to claim actual operating costs and depreciation, then depreciation can be claimed only if the tax basis of the vehicle is greater than zero.
|Source: Publication 505, Tax Withholding and Estimated Tax|
- Medical driving trips include those to a doctor, pharmacy, hospital, and other medical facilities. However, this deduction is an itemized deduction and can only be deducted if the total of medical costs, including driving, exceeds 10% of the taxpayer's adjusted gross income (AGI), or 7.5% of AGI if the taxpayer or spouse is at least 65 by year-end. The 10% rate will apply to everyone after 2016.
- Trips to rental properties or other investments can be deducted at the same rate as a business deduction. Driving related to rental property is deducted on Schedule E, Supplemental Income and Loss; trips to other investments are deducted on Schedule A, Itemized Deductions as a miscellaneous itemized deduction subject to the 2% AGI floor.
- If the taxpayer is audited, then any trips required for the audit are deductible at the same rate as business travel, but it can only be deducted as a miscellaneous itemized deduction subject to the 2% AGI floor.
Because the depreciation is not claimed separately using the standard mileage rate, there is a deemed depreciation, equal to the depreciation rate per mile times the business use percentage. When the vehicle is disposed of, a reduced depreciation can be claimed for the last year, equal to 50% of the amount of the annual amount, but only if the vehicle was placed in service in January – September; otherwise, the amount of depreciation that can be claimed in the last year depends on the quarter in which it was sold, equal to the percentage of the depreciation that could have been claimed for a full year:
- January – March: 12.5%
- April – June: 37.5%
- July – September: 62.5%
- October – December: 87.5%
Example: Calculating Deemed Depreciation under the Standard Mileage Rate
You buy a car for $25,000 in 2010, claiming the standard mileage rate for the business use of the car. The miles driven and the resulting deemed depreciation are recorded in the following table:
|Tax Year||Business |
At the end of 2015, you sell the car for $4000.
|Final Adjusted Basis||$2,860||= Car Price – Total Depreciation|
|Gain or Loss||$1,140||= Sale Price – Final Adjusted Basis|
The taxpayer must keep accurate records of the miles driven that include:
- the purpose of the business trip
- customers visited
- beginning and ending odometer readings for each stop of the trip.
A record must also be kept showing the total number of business miles driven, and the total number of miles for the year. Generally, commuting miles are not deductible. However, if a self-employed person works out of a home office, then trips from the home office to work sites are deductible.
An employee can claim actual automobile expenses or the standard mileage rate on Form 2106, Employee Business Expenses, which requires that the mileage for business, commuting, and other personal trips be listed. However, only the standard mileage rate can be claimed if the employee is using Form 2106-EZ. If the employee is reimbursed by the employer at a rate that is less than the standard mileage rate, then the employee can deduct the difference between the IRS rate and the reimbursed rate. Unreimbursed vehicle costs can be claimed on Schedule A, Itemized Deductions as miscellaneous deductions that are subject to the 2% AGI floor. The self-employed can claim business expenses on Schedule C, Profit or Loss from Business. If a self-employed person decides to use actual operating costs plus depreciation, then the depreciation must be listed on Form 4562, Depreciation and Amortization (Including Information on Listed Property). The self-employed are not subject to the 2% AGI floor.
Instead of using the IRS standard mileage rate, an employer may use a fixed and variable rate allowance (FAVR), which allows an employer to reimburse an employee for a specific amount to cover fixed costs such as lease payments, insurance, registration, and depreciation, and a variable rate to cover gas and other operating expenses. However, the reimbursement must reflect local costs. Any expenses within the FAVR limits will be deemed substantiated by the IRS and, if paid from an accountable plan, the employer does not have to include the reimbursements in the employee's wages, so the employee saves both ordinary and employment taxes on the reimbursements.