In response to rising fuel prices, the IRS has increased the standard mileage rate for business, medical and moving expenses for miles driven from July 1^st through December 31^st 2008. Taxpayers generally can use the optional standard mileage rates instead of accounting for actual vehicle expenses.

 

 

Please note that using the standard mileage method is optional. If you are driving a car or truck for business that gets few miles to the gallon, you may receive a larger deduction by deducting all of your actual expenses (the deduction is prorated based upon the percentage your vehicle is used for business). Vehicle operating expenses used to calculate the deduction include:

·        Depreciation

·        Repairs and maintenance

·        Gas and oil

·        Car washes

·        Insurance

·        Registration

·        Excise tax

·        Finance charges (Schedule C filers only)

 

You purchase a SUV in January for $35,000 and drive it 20,000 miles (of which 5,000 are for business). The SUV gets only 16 miles per gallon and you spent $4,500 on gas, $1,500 for insurance, $2,400 in auto loan interest charges, $800 for excise tax and another $500 for maintenance. Your operating expenses of $9,700 plus $7,000 in depreciation total $16,700. Since you used the SUV 25% for business, your deduction is $4,175 ($16,700 x 25%) if you use the actual expenses method vs. $3,525 using the standard mileage rate. Your deduction is increased by $550 and could save you as much as $300 in federal, self-employment and state taxes. Naturally, you have to save receipts and account for all of the expenses associated with the vehicle.

 

IRS rules require that if you use your actual expenses in the first year you operate the vehicle for business you cannot use the standard mileage rate for any future tax years you own the vehicle. However, if you use the standard mileage rate in the first year, you can “pick and choose” which method you want from year-to-year. For example, I used the cents per mile method when my car was new but after 11 years it is becoming expensive to fuel and maintain so I have since switched to using actual operating expenses.

 

I’d also like to remind my clients of the recordkeeping requirements for most vehicles. Please remember that you must maintain a written record of your business miles driven each tax year. This can be a mileage log book (which I hand out to every client each year who claims business mileage), expense reports indicating miles traveled or computerized records that can be reprinted. If you use the standard mileage method, the only additional documentation required would be proof of finance charges and excise tax paid.  All of the other operating expenses are tied into the IRS-prescribed rate.

 

The IRS has the authority to disallow all vehicle expenses if a contemporaneous (prepared at or close to the time the vehicle was driven) written account of business miles cannot be produced if you are audited. There is also a box that must be checked on the tax when deducting business mileage indicating whether or not a written record exists.

If you have any questions regarding deducting vehicle expenses please feel free to call or email my office.