Which Should I Choose - Standard Mileage Deduction or Actual Costs?
In June, the IRS announced an increase in the standard mileage rates for the final six months of 2011. In their news announcement, the IRS wrote, “This year’s increased gas prices are having a major impact on individual Americans so the IRS is adjusting the standard mileage rates to better reflect them.”
For your convenience, here are the mileage rates for 2011:
Taxpayers can use one of two methods to deduct vehicles expenses: standard mileage rate and actual expense method.
Traditionally I have always favored the standard mileage deduction because it’s easy and for many of my clients it was the better deduction anyway. For other clients it was a good choice because they did not keep good records.
However, with the price of gas continuing to rise, it’s time to take a closer look at the actual expense method.
Does the increased standard mileage rate truly reflect the actual cost of using a car in my business? Would I be better off deducting my actual costs?
What are the rules?
Standard Mileage Rate
This is the simplest method to use. Take your total business miles driven for the year and multiply by the mileage rates above (see above for the two rates in effect for 2011). Add in additional expenses such as parking, tolls and interest on your car loan and you’re done.
Actual Expense Method
This method requires you to keep track of all costs of operating the vehicle during the year. But the extra work might mean additional tax savings at year-end.
Regardless of the method you choose, you still have to track business miles. I make a note of my odometer reading on January 1st each year on all of my vehicles. Throughout the year, I track my business miles. So every year I know the total number of miles I put on my vehicle and of those miles how many were business.
Which method should I choose?
It depends. There are no hard and fast rules since so many variables can affect the answer such as the number of miles you drive, what you paid for the vehicle and how long you expect to own it.
Actual Expense Method
Buying a luxury car (over $16,000 for the IRS – apparently they are a thrifty bunch) coupled with minimal driving tends to favor the use of the actual expense method.
You might think that’s because a more expensive car gets a bigger depreciation deduction. Not so. The IRS has placed limits on the amount of depreciation you can take on luxury vehicles. Depreciation for a car costing $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 and in some cases fuel costs.
So if you own a Mercedes, Porsche, Jaguar, Audi, Lexus, Cadillac, or large sports utility vehicle such as a Chevrolet Suburban, or Ford Explorer, and you don’t drive it very many miles you may benefit considerably using the actual costs method.
Standard Mileage Rate Method
On the other hand, buying an inexpensive to operate car - or better still a Hybrid or green electric vehicle (tax deductions available here, see my post on that topic) and racking up the business miles tips the scale in favor of the standard mileage rate. The cheaper the car is to operate, the better the standard mileage method will be.
If you are like me and hold on to your cars for a long time (cars are an expense, not an investment), then the standard mileage rate might get you a better deduction.
The only way to know for sure which method will save more taxes is to keep great records throughout the year (including receipts for gasoline and other car-related expenses). Then you can figure the deduction both ways and use the better method.
“Can’t I just switch back and forth each year depending on if I had major expenses/repairs or drove major miles?”
You can switch from the standard mileage method to the actual expense method at any time. But there are special rules for switching from the actual expense method to the standard mileage rate. If you choose this method in the first year, you are usually committed to it. Ask your CPA for some help in this area.
If you would like to visit, call me to set up an appointment. My contact information is on my website.
For your convenience, here are the mileage rates for 2011:
· Business: 55.5 cents per mile (Compared to 51 cents for 1st six months)
· Medical: 23.5 cents per mile (Compared to 19 cents for 1st six months)
· Moving: 23.5 cents per mile (Compared to 19 cents for 1st six months)
· Charitable: 14 cents per mile (Unchanged)
Taxpayers can use one of two methods to deduct vehicles expenses: standard mileage rate and actual expense method.
Traditionally I have always favored the standard mileage deduction because it’s easy and for many of my clients it was the better deduction anyway. For other clients it was a good choice because they did not keep good records.
However, with the price of gas continuing to rise, it’s time to take a closer look at the actual expense method.
Does the increased standard mileage rate truly reflect the actual cost of using a car in my business? Would I be better off deducting my actual costs?
What are the rules?
Standard Mileage Rate
This is the simplest method to use. Take your total business miles driven for the year and multiply by the mileage rates above (see above for the two rates in effect for 2011). Add in additional expenses such as parking, tolls and interest on your car loan and you’re done.
Example: Luke drives 20,000 miles in 2011: 16,000 miles for business and 4,000 for personal use. Luke keeps meticulous records and knows that he drove 10,000 business miles in the first half of the year and 6,000 in the 2nd half of the year. If he uses the standard mileage rate method, his 2011 vehicle deduction would be: $8,430. (10,000 * .51 = $5100 plus 6,000 * .555 = $3,330)
Actual Expense Method
This method requires you to keep track of all costs of operating the vehicle during the year. But the extra work might mean additional tax savings at year-end.
1. Add up all of your vehicle related expenses such as
a. Cleaning,
b. Gas and oil
c. Insurance
d. Interest on the car loan
e. Garage rental
f. Personal property taxes
g. Repairs and maintenance
h. Tires
i. Supplies and tolls.
2. Add a depreciation deduction. I suggest using tax software or a CPA rather than calculating by hand.
3. Calculate the percentage of time you use the vehicle for business by dividing the number of business miles driven by the total number of miles driven in the year.
4. Multiply this percentage by the sum of your car expenses in 1 and 2 and use this as your deduction.
Example: Luke drives 20,000 miles in 2011: 16,000 miles for business and 4,000 for personal use. Luke keeps meticulous records and knows that the sum of his operating costs to drive the vehicle including depreciation is $10,000. Since Luke uses his vehicle for business and personal use, he must calculate his business use percent: 80% (16,000 business miles / 20,000 total miles). If Luke uses the actual expense method to deduct vehicle expenses, his deduction is $8,000 ($10,000 vehicle operating costs * 80% business use percent)
Regardless of the method you choose, you still have to track business miles. I make a note of my odometer reading on January 1st each year on all of my vehicles. Throughout the year, I track my business miles. So every year I know the total number of miles I put on my vehicle and of those miles how many were business.
Which method should I choose?
It depends. There are no hard and fast rules since so many variables can affect the answer such as the number of miles you drive, what you paid for the vehicle and how long you expect to own it.
Actual Expense Method
Buying a luxury car (over $16,000 for the IRS – apparently they are a thrifty bunch) coupled with minimal driving tends to favor the use of the actual expense method.
You might think that’s because a more expensive car gets a bigger depreciation deduction. Not so. The IRS has placed limits on the amount of depreciation you can take on luxury vehicles. Depreciation for a car costing $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 and in some cases fuel costs.
So if you own a Mercedes, Porsche, Jaguar, Audi, Lexus, Cadillac, or large sports utility vehicle such as a Chevrolet Suburban, or Ford Explorer, and you don’t drive it very many miles you may benefit considerably using the actual costs method.
Standard Mileage Rate Method
On the other hand, buying an inexpensive to operate car - or better still a Hybrid or green electric vehicle (tax deductions available here, see my post on that topic) and racking up the business miles tips the scale in favor of the standard mileage rate. The cheaper the car is to operate, the better the standard mileage method will be.
If you are like me and hold on to your cars for a long time (cars are an expense, not an investment), then the standard mileage rate might get you a better deduction.
The only way to know for sure which method will save more taxes is to keep great records throughout the year (including receipts for gasoline and other car-related expenses). Then you can figure the deduction both ways and use the better method.
“Can’t I just switch back and forth each year depending on if I had major expenses/repairs or drove major miles?”
You can switch from the standard mileage method to the actual expense method at any time. But there are special rules for switching from the actual expense method to the standard mileage rate. If you choose this method in the first year, you are usually committed to it. Ask your CPA for some help in this area.
If you would like to visit, call me to set up an appointment. My contact information is on my website.
