James C. DeRidder, BridgeTower Media Newswires
Are you self-employed and looking for ways to save time, cut down on your recordkeeping duties, and reduce your paperwork and retention of old receipts? The optional standard mileage rates for business vehicles can help you do that. Businesses that operate up to four vehicles at the same time can deduct this standard mileage rate rather than keeping track of depreciation, gas, and repairs.
The standard business mileage rate for 2020 is 57.5 cents-per-mile. The business rate reflects, among other things, gasoline, depreciation and maintenance costs each year. The standard business mileage rate for 2019 was 58 cents-per-mile.
Businesses that use no more than four vehicles for business purposes can use the business standard mileage rate. Generally, the IRS prohibits taxpayers from using the business standard mileage rate to compute the deductible expenses of five or more vehicles the taxpayer owns or leases and uses simultaneously, such as in a fleet operation.
The depreciation component of the business standard mileage rate is 27 cents-per-mile for 2020 and 26 cents for 2019. Businesses that use the standard mileage rate are not allowed to take actual depreciation deduction amounts, even if they are higher than the depreciation component. Before deciding to use the standard mileage rate, a look at whether you will do better under the actual expense method, which includes actual depreciation, should be considered. Especially for circumstances in which Code Section 179 expensing and/or bonus depreciation is available, taking actual expenses, including actual depreciation, may be worth the effort.
If depreciation is taken on a business vehicle, the so called “luxury vehicle” limits imposed by Congress were put in place to make sure that vehicles selling above a certain dollar amount did not enable their owners to take a larger write-off because of that premium cost. The “luxury vehicle” limits are designed to do just that, although taxpayers may debate the dollar amount above which Congress set the “luxury” level. Fortunately, the Tax Cuts and Jobs Act of 2017 greatly increased that amount to a level that more closely equates to what one would consider a luxury vehicle. For example, the maximum depreciation deduction for passenger automobiles and for trucks and vans first placed in service in 2019 (for which no first-year bonus depreciation applies) is $10,100 for the first year and $16,100 for the second year. In 2016, the same limits were only $3,160 and $5,100. Note that if you purchase a sport utility vehicle, or a truck with a gross vehicle weight of 6,000 pounds or greater, different rules may apply.
Bonus depreciation is still available and may be added to the first-year deduction allowed on the purchase of a vehicle used for business if certain criteria are met. For most vehicles (those that are not fully depreciated in their first year after applying the cap), business taxpayers claiming bonus depreciation are allowed an additional $8,000 in first year depreciation over and above the $10,100 first-year limit.
A new or used vehicle may qualify for expensing under Code Sec. 179 in the tax year that it is placed in service if business use of the vehicle exceeds 50 percent. However, the sum of the section 179 expense deduction and regular first-year depreciation deduction (including any bonus depreciation) cannot exceed the applicable first-year depreciation cap for that vehicle.
If you use your business vehicle for personal trips (including commuting back and forth from home and your principle business location) you must pro-rate your deduction to exclude the percentage of personal use. As long as you use your vehicle more than 50 percent for business during the year, you can pro-rate your deduction. You also have the option of using the standard mileage rate, based on miles of business use for the year times the prescribed rate.
While much of the above reflects how the tax laws are applied to the self-employed, there may be different rules if you are the owner or employee of a business operated as a Corporation, or flow through entity like an S Corporation or Partnership. Use of the standard mileage rate and how personal use of a company vehicle may be different. For instance, if you are provided a company vehicle and use it personally (including commuting), the company may add the value of the personal use to your wages or other income. If that is the case, it is very important to substantiate your deduction, and keeping a mileage log is always required whenever there is personal use involved.
As with anything involving taxes, there are different sets of rules for various situations, and you should always consult your tax advisor. Whether it has to do with vehicles, or any other tax issue, it is better to seek advice ahead of time so that you can make the best decision and hopefully save you money at tax time.
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James C. DeRidder, CPA, is a principal with Mengel, Metzger, Barr & Co. LLP. He can be reached at JDeridder@mmb-co.com.
