Fun Asia Show Recording-December 5, 2013

Standard Mileage Rate – How It Can Avoid Auto Expense Limits


Tax Issue

For owners of passenger automobiles, section 280F imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. However, the limitations of section 280F do not apply to depreciation expense calculated using the standard mileage rate method.


Applicable Tax Law

Passenger autos. For purposes of the section 280F limitations, a passenger auto is any four-wheeled vehicle that is made primarily for use on public streets, roads, and highways. Its unloaded gross vehicle weight must not be more than 6,000 pounds. A passenger auto includes any part, component, or other item that is physically attached to it or is usually included in the purchase price.

Actual expense. When the actual expense method is used, the cost of the vehicle is depreciated under the Modified Accelerated Cost Recovery System (MACRS), using a 5-year recovery period. The Section 179 deduction is also allowed for business vehicles. The annual deduction or additional first-year bonus depreciation, is limited to statutory amounts. The limits are adjusted each year for inflation.

The annual deduction is the lesser of:

  • The vehicle’s basis multiplied by the business use percentage multiplied by the applicable depreciation percentage, or
  • The section 280F limit multiplied by the business percentage.

Standard mileage rate. The standard mileage rate can be used to replace the actual cost of depreciation, lease payments, maintenance and repairs, gasoline, oil, insurance, and vehicle registration fees.

Costs not included in the standard mileage rate. In addition to deducting the standard mileage rate, the business percentage of the following costs is deductible.

  • Interest expense for a self-employed individual.
  • Personal property taxes.
  • Parking fees and tolls.

To use the standard mileage rate for a car that is owned by the taxpayer, it must be used in the first year the car is available for business. The choice must be made by the due date (including extensions) of the return and cannot be revoked. In later years, the taxpayer can choose between either the standard mileage rate method or actual expenses.

To use the standard mileage rate for a car that is leased by the taxpayer, it must be used for entire lease period.

To use the standard mileage rate, a taxpayer must own a lease the car, and:

  • Must not operate five or more cars at the same time, as in a fleet operation,
  • Must not have claimed a depreciation deduction using MACRS on the car in an earlier year, including any additional first-year depreciation or “bonus depreciation” or any method other than straight-line for its estimated useful life,
  • Must not have claimed a Section 179 deduction on the car, and must not have claimed actual expenses after 1997 for a leased car, and
  • Cannot use the standard mileage rate if he or she is a rural mail carrier who received a “qualified reimbursement”

If a taxpayer used the standard mileage rate in the first year of business use and changes to the actual expenses method in a later year, the taxpayer cannot depreciate his or her car under the MACRS rules. The taxpayer must use straight-line depreciation over the estimated remaining useful life of the car. To figure depreciation under the straight-line method, the taxpayer must reduce his or her basis in the car (but not below zero) by a set rate per mile for all miles for which he or she used the standard mileage rate.  The rate per mile varies depending on the year(s) the taxpayer used the standard mileage rate.

Generally, to obtain a deduction for travel expenses, a taxpayer must substantiate the amount of expense (or mileage for vehicles), the time and place of use, and the business purpose of use by adequate record or sufficient evidence.  A taxpayer may substantiate vehicle expenses by maintaining an account book, diary, or similar record, trip sheets, and documentary evidence, including receipts and paid bills.


Tax Planning Strategies

Taxpayers need to compare the actual expense of operating a vehicle used in business for the year versus the standard mileage rate before assuming one deduction is better that the other.

Because of depreciation limitations, it may take 10 years or more to fully depreciate a higher-cost vehicle. Taking the standard mileage rate may provide an overall higher deduction in a shorter time period.

If depreciation claimed using the standard mileage rate exceeds the adjusted basis in the car, the car is considered fully depreciated and no additional depreciation can be claimed under the actual expense method. However, this does not prevent the taxpayer from continuing to use the full business standard mileage rate to figure a deduction. The depreciation standard mileage rate is used only for purposes of calculating gain or loss if the vehicle is sold or calculating depreciation when switching from the standard mileage rate to the actual expense method.


Possible Risks

  • Taxpayers must use the standard mileage rate deduction in the first year the vehicle is placed in service. If the taxpayer took actual expenses in the first year, he or she must continue to use actual expenses throughout the duration of ownership and will be subject to the section 280F depreciation limitations each year.
  • Additionally, if a taxpayer claimed the Section 179 deduction or bonus depreciation in the first year of the vehicle’s use for business, he or she will be unable to claim the standard mileage rate for any subsequent year.
  • Special recapture rules apply when the business use of listed property drops to 50% or less. Therefore, if a taxpayer is using the standard mileage rate deduction, the amount of depreciation recapture may be greater than if he or she took actual expense depreciation.
  • When a taxpayer disposes of a vehicle after using the standard mileage rate, he or she must adjust the basis of the vehicle by the applicable depreciation portion of the standard mileage rate. This type of adjustment may be overlooked when using the standard mileage rate. Therefore, if a taxpayer has a loss on the disposition of the vehicle, he or she may end up reporting a higher loss than entitled to.
  • If a taxpayer did not drive a significant number of miles throughout the year, the section 280F limitations may not even make a difference when comparing actual expense depreciation deduction to the standard mileage rate depreciation portion.
  • If a taxpayer does not keep adequate records, the actual expenses or standard mileage rate deduction may be denied.


Court Case

A minister and his wife filed their 2001 tax return claiming various business deductions, including travel expenses. On their Schedule C, they claimed a deduction for parking fees and tolls and for the business use of their personal automobile calculated using the standard mileage rate. In addition to these travel expenses totaling $12,347, they also claimed car and truck expenses of $17,199.  Mr. Vigil testified that the car and truck expenses claimed represent his purchase of tires, valves, and three transmissions for their automobile in 2001. Not only did the Vigils not provide adequate records to substantiate their claimed deductions, but they attempted to claim actual expenses and the standard mileage rate.  Consequently, both types of deductions were disallowed. Additionally, the court reasoned that, “it should be obvious to any taxpayer exercising ordinary business care and prudence that duplicating automobile expenses (by deducting not only car and truck expenses based on actual costs but also driving expenses calculated using the standard mileage rate) is prohibited.” Therefore, the court found that the Vigils failed to prove that they acted with reasonable cause and in good faith with respect to the disallowed business expense deductions and that they were liable for the accuracy-related penalty on the underpayment associated with the disallowed Schedule C deductions. (Vigil, T.C. Summary 2008-6)