You can deduct auto expenses for business purposes using either the Standard Mileage method or the Actual Expenses method. You may choose the method you want to use. However; once you select the method, you may be stuck with using that method for the entire time you own or lease the vehicle.
While this section is primarily devoted to vehicles used by self-employed taxpayers, the general rules apply to employees who use their personal vehicle for business. However, employees need to address how their employer reimburses them for their car expenses.
This is an excerpt from a 2013 case involving a taxpayer who commuted to work daily that was located a significant distance from his home. Because the workplace was a PERMANENT and not a TEMPORARY location, no deduction for the travel was allowed:
The IRS lowered its mileage rates for 2014. Here is a recap of the standard mileage rates by year:
The supplemental first year vehicle write-offs due to bonus depreciation that has been a significant benefit to most businesses will expire at the 50% rate at the end of 2013 unless Congress extends bonus depreciation. Information I have received shows no change from the basic 2013 amounts for passenger automobiles and a slight $100 rise for trucks and vans in 2014, 2015 and 2016. Release of the official 2014 figures is expected early in 2014.
2014 vehicle depreciation caps
The projected luxury auto depreciation limits under Code Sec. 280F for passenger automobiles placed in service in 2014 are:
· $3,160 for the first year, the same as for 2013 ($11,160 for 2014, same as for 2013, only if Congress extends bonus depreciation into 2014);
· $5,100 for the second tax year, the same as for 2013;
· $3,050 for the third tax year, the same as for 2013; and
· $1,875 for each tax year thereafter, the same as for 2013.
Trucks and vans
The projected maximum depreciation limits under Code Sec. 280F for trucks and vans first placed in service during the 2014 calendar year are:
· $3,460 for 2014, up from $3,360 for 2013 ($11,460 if bonus depreciation is extended);
· $5,500 for the second tax year, up from $5,400 for 2013;
· $3,350 for the third tax year, up from $3,250 for 2013; and
· $1,975 for each tax year thereafter, the same as for 2013.
Trucks and vans are defined as passenger automobiles built on a truck chassis, including minivans and sport utility vehicles (SUVs) built on a truck chassis. Such vehicles with a gross weight of more than 6,000 pounds, however, generally are not subject to the “”luxury”” depreciation limits.
One permitted method that an employer can use to value the personal use of an employer-provided automobile is the standard mileage allowance rate but only if the vehicle’s FMV does not exceed certain amounts. For 2014 these amounts are projected to be:
· $16,000 for a passenger automobile (same as for 2013); and
· $17,300 for a truck or van, which includes minivans and SUVs built on a truck chassis (up from $17,000 in 2013)
Below is a graphical image (from the IRS) that may help explain the situations where an EMPLOYEE can deduct mileage (either standard rate or actual expenses). If a company has an employee attend training ON THE SAME DAY as they also perform work (e.g., you go to work from 8-12, then to a class at another location from 1-5), then the training can be treated as a “second job” in the example below. If you simply spend time (say, a week) traveling to the home office of the company (in the general area where normal work is performed) instead of commuting to a typical work site, then the travel is considered commuting and NOT deductible. However, if the company send you far away to a training location, then you are no longer within the area of your “tax home” – and that travel can be deductible.
The Standard Mileage Method
Using this method, you compute how many miles you drove for business, then multiply that number by the standard mileage rate that the IRS allows for the tax year (40.5 cents per mile for 2005 through 8/31/2005, then 48.5cents for the rest of 2005). That decreased to 44.5 cents in 2006. For 2007, it will go back up to 48.5 cents per business mile. For 2008, it increased to 50.5 cents per mile.
You can also deduct parking fees and tolls in addition to the standard business mileage rate. HOWEVER – any parking fees to park at your normal work are considered part of your commuting expense (as is the mileage to and from your normal work place) and are not deductible.
Tom is a real estate broker who used his personal car in his business. He used his car for a total of 20,000 miles in 2004. His business usage amounted to 12,000 miles (8,000 between 1/1 and 8/31, and 4,000 from 9/1 through 12/31/2005), and his personal use totaled 4,000 miles. In addition, he paid parking fees and tolls of $500 while visiting clients and escrow companies. Tom’s deduction for 2005 is $5,680 computed as follows:
8,000 x 40.5 cents = $3,240
4,000 x 48.5 cents = $1,940
$3,240 + $1,940 + $500 = $5,680 **
Using the standard mileage rate means easier record keeping and reporting.
Qualifying for the Standard Mileage Deduction
Here are several important aspects to using the standard mileage deduction:
1. You must actually OWN or LEASE the car. If you use someone else’s vehicle for business travel, you can ONLY deduct your out-of-pocket expenses for the business miles traveled. You are NOT entitled to depreciation since you do not own the asset (vehicle).
2. You must use the standard mileage method in the first year you place your car in service in your business if you want to use that method at any other time during the life of the vehicle.
3. If you want to use the standard mileage method for a leased vehicle, you must use that method during the entire lease period. You cannot switch and use actual expenses in lieu of the standard mileage rate partway through the lease.
Starting in 2004, the standard mileage rate rules changed to allow use of the standard mileage rate if you used no more than four vehicles at the same time for business. Previously, you couldn’t use the standard mileage method with respect to ANY car if you owned two or more vehicles that were used at the same time in the same business.
If you own more than one car that you use for business, but alternate use of vehicles, (for example, you normally use your sedan, but occasionally use a pick-up truck if you need to do some hauling), you can use the standard mileage method for both cars.
You cannot use the standard mileage method if you:
Use the car for hire (such as a taxi)
Operate more than four cars at the same time
Claimed a depreciation deduction for the vehicle using MACRS in an earlier year
Claimed a Section 179 deduction on the car
Claimed actual expenses after 1997 on a leased vehicle
Are a rural mail carrier who received a qualified reimbursement of expenses
IF YOU SELL A VEHICLE FOR WHICH YOU CLAIMED THE STANDARD MILEAGE RATE, YOU MAY HAVE A TAXABLE GAIN, OR A REDUCED LOSS BECAUSE YOU NEED TO TAKE INTO CONSIDERATION THE IMPUTED DEPRECIATION CLAIMED BY WAY OF THE MILEAGE DEDUCTION.
You multiply the BUSINESS MILES claimed over the life of the vehicle by the rates below for the specific year.
Deducting Actual Expenses
You may be able to deduct your actual car expense, such as:
Interest (as a business owner, but not as an employee)
If you use your car for personal and business use, you must divide your expenses between the business and personal usage periods. You can divide your expenses based on the miles driven for each purpose. Basically, this means that you must keep track of your mileage! You must also keep complete and precise records of your expenses.
Tracking Depreciation of the Vehicle
The most complicated deduction you can take using the Actual Expenses method is for depreciation. In general, you are allowed to depreciate your vehicle using the MACRS depreciation method. But if you used the standard mileage rate method at any time during the life of the auto, you must use the straight-line method to calculate depreciation.
If the vehicle is used less than 50% of the time for business, you must use the straight-line method. In addition, you may take a Section 179 deduction in the year that the vehicle is placed into service in your business. as long as your business use exceeds 50%. Like other expenses, your depreciation is only allowed to the extent of your business use of the vehicle.
Depreciation for vehicles is limited to a maximum amount per vehicle. The following chart summarizes the maximum depreciation and Section 179 expense allowed for each vehicle through 2006. I will update the chart when I have time. The information is available on the web:
|For Cars Placed in Service||Passenger Car Depreciation Allowable in-|
|After||Before||Year 1||Year 2||Year 3||Year 4|
Note that the maximum annual amounts shown in the chart assume that the vehicle was used 100 percent for business. The amounts must be proportionately reduced if your business use of the vehicle was less than 100 percent.
This table represents the maximum depreciation you can claim. For the first year, if you used the car more than 50 percent for business, you may claim a proportionate part of the full amount, regardless of the actual cost of the car.
Beginning in 2003, separate maximum depreciation caps apply to trucks and vans. The following amounts are for trucks and vans placed in service in 2007: $3,260 in year one; $5,200 in year two; $3,050 in year three; and $1,875 for each year thereafter.
For later years, you must compute your depreciation on the car using the usual methods, but can’t deduct more than the amount shown in the chart. As long as you continue to use the car more than 50 percent for business, you would multiply the business percentage of the car’s cost by the percentage shown in the normal MACRS table for five-year property. The dollar amounts in the chart above, reduced proportionately for any non-business use of the car, acts as a ceiling on the amount of depreciation you can actually claim.
If you use the car 50 percent or less for business, you must use the straight-line ADS method for five-year property for that year, and for every subsequent year.
If you started out depreciating the car under MACRS, but then your business use dropped to 50 percent or less which required you to switch to the straight-line ADS method, you will have to “give back” some of the depreciation you claimed. Specifically, you’ll have to report as income the amount (if any) by which the total MACRS depreciation you claimed is greater than the total straight-line depreciation you would have been entitled to claim.
If you own a relatively lower-priced car, you can expect to recover the entire basis of the business portion of the car over the six tax years for which the MACRS depreciation deductions are generally claimed.
However, when part of the normal MACRS deduction is disallowed because of the luxury car limitations, you’ll recover only a portion of the car’s basis during the normal recovery period. In that case, you may continue to depreciate the car for as long as it takes to recover the remaining basis of the business portion of the car.
* – Only if the 50% bonus depreciation is elected, if not the first year cap of 7,660 must be used.
If you lease your vehicle, you must reduce the deduction for your lease payment by an inclusion amount, which is similar to limiting the depreciation on the vehicle in order to place leased cars and purchased cars on equal footing as far as deductions. The inclusion amount is based on the fair market value of the vehicle at the time of purchase. The IRS publishes tables that are used to calculate the amount of the inclusion (reduction in lease expense). For more information on depreciation and leased vehicles, see IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.
Record Keeping Requirements
If you deduct automobile expenses, you must be able to prove your expenses. Keep adequate records with sufficient evidence to support your own statements about your business usage.
Write it Down.
The IRS prefers written evidence to oral evidence. Electronic evidence is basically the same as written evidence – you may keep your mileage on your personal digital assistant.
Keep a Log.
For either method, you should keep a mileage log showing business and personal miles driven for the year.
If you are using the actual expenses method, you must keep the mileage log plus your receipts, cancelled checks, or other evidence to support your particular vehicle expenses.
You should keep your records for at least three years after filing your tax return. Caution: states have different statutes of limitation, meaning that you may have to keep the records longer for state purposes than you otherwise would for federal purposes. Find out your state requirements before you toss those records.
For more information on deductions for the business use of your auto, see IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.
You can deduct any additional costs you had for hauling tools or instruments (such as the rental of a trailer you tow with your car). You cannot deduct fines you paid for traffic violations, sales taxes paid when purchasing a car (these are part of the car’s basis when calculating depreciation), or, if you are an employee, interest paid on a car loan, as this interest is treated as personal interest. However, if you used a home equity loan to purchase your car, you may be able to deduct this personal interest on Schedule A.
If the car was used only partly for business, expenses must be allocated between personal and business use. You will usually use a percentage based on miles driven for business purposes during the year over total number of miles driven during the year.
Distinguishing between business and personal mileage.
Following are the most commonly encountered driving situations for employees and self-employed taxpayers, and how the mileage should be treated:
Overnight trips. A taxpayer who drives away from his tax home on an overnight trip that is undertaken primarily for business is engaged in business driving, even if there is some personal element to his trip (e.g., a visit with relatives). By contrast, if the trip is undertaken primarily for personal reasons, the mileage between tax home and destination is not business related even if the taxpayer engages in some business activity at the destination. ( Reg. § 1.162-2(b)(1) )
Travel between two local business locations. This is treated as business travel whether the locations are related to one business or several. ( Rev Rul 95-109, 1995-1 CB 261 ). For example, An accountant has an office in town, but regularly travels to clients during the day by auto. The mileage between his office and the clients’ offices, and then back to his office, is business mileage
Commuting. The trip from the taxpayer’s home to his regular place of business or employment, and back, is personal travel. ( Reg. § 1.162-2(e) , Reg. § 1.262-1(b)(5) ) Where the taxpayer works outside of the home and has several regular places of business, the trip from home to the first business stop, and the trip back home from the last business stop, is nondeductible commuting. A regular place of business is any location at which the taxpayer works or performs services on a regular basis. ( Rev Rul 99-7, 1999-1 CB 361 ). For example, a doctor performs services on a regular basis at his office in a medical-arts building, and at a hospital clinic. The trip from home to either practice location is commuting. However, if the doctor drives from his office to the clinic during the day, and then back to the office, that mileage is business-related.
Travel between a home that’s the principal place of business and another place of work. If a taxpayer’s residence is his principal place of business, he can deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance. Whether the taxpayer’s residence is his principal place of business is determined under the home office expense deduction rules of Code Sec. 280A(c)(1)(A) , as explained below. ( Rev Rul 99-7, 1999-1 CB 361 )
Travel between home and a temporary business location. Under the “temporary” work location rules:
(1) Transportation between the taxpayer’s residence that’s not his principal place of business and a temporary business location outside the metropolitan area where the taxpayer lives and normally works is business transportation. For example, an employee normally drives or takes the train to the company offices in the city. Every two or three months, he spends a couple of days at a supplier’s factory 30 miles away. If he drives each day from his home to the factory and back, the trip is treated as business transportation.
(2) Transportation between the taxpayer’s residence that’s not his principal place of business and a temporary work location in the same trade or business within the metropolitan area where the taxpayer lives and normally works is business transportation only if the taxpayer has one or more regular work locations away from his residence. ( Rev Rul 99-7, 1999-1 CB 361 )
When is a taxpayer’s residence his principal place of business? There are two ways that a taxpayer’s residence qualifies as his principal place of business: the statutory administrative/management activities test and the comparative analysis test.
Under the statutory administrative/management activities test, the principal place of business test is met if a portion of the home is used for the administrative or management activities of any trade or business of the taxpayer, but only if there is no other fixed location where the taxpayer conducts substantial administrative or management activities of that trade or business. ( Code Sec. 280A(c)(1) ) Examples of administrative or management activities are: billing customers, clients or patients; keeping books and records; ordering supplies; setting up appointments; and forwarding orders or writing reports.
Under the comparative analysis test, set forth under the Supreme Court’s Soliman decision, the determination of a taxpayer’s principal place of business requires a comparative analysis of: (1) the relative importance of the activities performed at each business location, and (2) the time spent at each place, i.e., the amount of time spent at the home compared with the amount of time spent in each of the other places where business activities occur. If the nature of the trade or profession requires the taxpayer to meet or confer with clients or patients or to deliver goods or services to a customer, the place where that contact occurs, particularly where that place is a facility with unique or special characteristics, is often important.
When is a work location “temporary”? A work location is “temporary” for purposes of deducting daily transportation costs if employment at the location is realistically expected to last (and in fact does last) for one year or less. If employment at a work location initially is realistically expected to last for one year or less, but at some later date it is realistically expected to exceed one year, that employment is temporary (absent facts and circumstances indicating otherwise) until the date that the taxpayer’s realistic expectation changes, and is treated as not temporary after that date. ( Rev Rul 99-7, 1999-1 CB 361 )
Where an assignment at a work location is expected to last for more than one year, but the taxpayer is realistically expected to be present at that location for no more than 35 workdays (partial or complete) during each of the calendar years in that period, the location is temporary for a calendar year in which he actually works there for no more than 35 partial or complete workdays. For example, a taxpayer who normally works in an office building works at an offsite location on an assignment lasting 36 months, but he is at the offsite location for only 30 days each year. The offsite location is “temporary,” and his round-trip transportation costs between home and that location are deductible.
* * * * * * * * * *
Not all commuting miles are treated the same for tax purposes and they may not be considered to be for business purposes. Your costs of driving a car between your home and your main or regular place of work are personal commuting expenses and are not deductible, no matter how far your home is from your regular place of work and regardless whether you worked during the commuting trip. For example, if you make business calls on your cell phone while driving or you have a business associate riding with you and you discuss business on the way to work, this does not change the regular commute from a personal expense to a business expense. Additionally, if you have a business advertisement on your car or if you haul tools or instruments in your car while commuting to and from work, the regular commute is still considered a personal expense.
Although regular commuting to and from work is not deductible, commuting miles may count as business use if your home is your office, if you are working out of a temporary location, or if you work in two or more different places during the day. For example:
Your principal place of business is in your home. You can deduct the cost of round-trip transportation between your qualifying home office and your client or customer’s place of business.
You have no regular office and you do not have an office in your home. In this case, the location of your first business contact is considered your office. Transportation expenses between your home and this first contact are nondeductible commuting expenses. Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. Although you cannot deduct the costs of these trips, you can deduct the costs of going from one client or customer to another.
You regularly work in an office in the city where you live. Your employer sends you to a one-week training session at a different office in the same city. You travel directly from your home to the training location and return each day. You can deduct the cost of your daily round-trip transportation between your home and the training location.
You do not have a regular place of work but you ordinarily work in the metropolitan area where you live. You can deduct your daily transportation costs between your home and a temporary work site if it is outside that metropolitan area.
You work at two places in one day. Whether or not you work for the same employer, you can deduct your expense of getting from one workplace to the other. However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the amount it would have cost to go directly from the first location to the second.
Fees you pay to park a car at work or tolls paid to get to work are nondeductible commuting expenses. However, business-related parking fees and tolls are deductible (for example, when visiting a customer, traveling to a temporary work location, attending a seminar, or when looking for a job in a related field) whether you take the standard mileage method or actual expenses method.
Car and Truck Expense Deduction Reminders
IRS ISSUES 2019 DEPRECIATION DOLLAR LIMITS FOR PASSENGER AUTOMOBILES
Rev Proc 2019-26, 2019-24 IRB
IRS has issued the Code Sec. 280F depreciation limits for business passenger automobiles placed in service by the taxpayer in 2019. IRS has also released the annual income inclusion amounts for such vehicles first leased in 2019.
Code Sec. 280F, as modified by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017), imposes limitations on the depreciation deduction allowed for passenger automobiles for the year the taxpayer places the vehicle in service and for each succeeding year.
The TCJA modified Code Sec. 168(k) to extend the additional (bonus) first-year depreciation deduction for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2027. Generally, the TCJA allows a 100% bonus first-year deduction of the adjusted basis of qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. In later years, the first-year bonus depreciation deduction declines approximately 20% per year, as follows:
- 80% for property placed in service after Dec. 31, 2022, and before Jan. 1, 2024.
- 60% for property placed in service after Dec. 31, 2023, and before Jan. 1, 2025.
- 40% for property placed in service after Dec. 31, 2024, and before Jan. 1, 2026.
- 20% for property placed in service after Dec. 31, 2025, and before Jan. 1, 2027.
In the case of a passenger automobile, for qualified property acquired by the taxpayer before Sept. 28, 2017, and placed in service by the taxpayer during 2019, Code Sec. 168(k)(2)(F)(iii) increases the first-year depreciation allowed under Code Sec. 280F by $4,800.
For qualified property acquired and placed in service after Sept. 27, 2017, Code Sec. 168(k)(2)(F)(i) increases the first-year depreciation allowed under Code Sec. 280F by $8,000.
2019 depreciation limits for passenger autos.
The following are the annual depreciation dollar caps for vehicles that are subject to the limits in Code Sec. 280F and are placed in service by the taxpayer during calendar year 2019.
The depreciation limits for passenger automobiles acquired by the taxpayer before Sept. 28, 2017, and placed in service by the taxpayer during 2019, to which the Code Sec. 168(k) bonus first-year depreciation deduction applies, are:
- $14,900 for the placed-in-service year;
- $16,100 for the second tax year;
- $9,700 for the third tax year; and
- $5,760 for each succeeding year.
The depreciation limits for passenger automobiles acquired by the taxpayer after Sept. 27, 2017, and placed in service by the taxpayer during calendar year 2019, to which the Code Sec. 168(k) bonus first-year depreciation deduction applies, are:
- $18,100 for the placed-in-service year;
- $16,100 for the second tax year;
- $9,700 for the third tax year; and
- $5,760 for each succeeding year.
For passenger automobiles placed in service during calendar year 2019, for which the taxpayer is not entitled to Code Sec. 168(k) bonus depreciation, the depreciation limits are:
- $10,100 for the placed-in-service year;
- $16,100 for the second tax year;
- $9,700 for the third tax year; and
- $5,760 for each succeeding year.
Leased income inclusion tables
A taxpayer that leases a business auto may deduct the part of the lease payment representing business/investment use. If business/investment use is 100%, the full cost of the lease is deductible. However, lessees must include a certain amount in income for each year of the lease to partially offset the lease deduction. (Code Sec. 280F(c)) The income inclusion amount varies with the initial FMV of the leased auto and the year of the lease and is adjusted for inflation each year.
Rev Proc 2019-26 also provides the income inclusion tables for passenger autos for which the lease term begins during calendar year 2019 and the vehicle has a FMV over $50,000. Lessees of passenger automobiles must use these tables to determine the inclusion amount for each tax year during which the passenger auto is leased.