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Taxes from A to Z: B is for Business Mileage

March 4, 2011 · 4 comments

Section 162 allows taxpayers to deduct expenses incurred in the course of a trade or business that are deemed “ordinary and necessary.” One of the most common of these expenses is the cost of operating a car, van, pickup truck or panel truck. When it comes to deducting those costs, taxpayers have a couple of options: the “actual car expenses” or the “standard mileage rate.”

“Actual car expenses” are exactly what they sound like: the actual costs allocable to the use of the car business. This includes depreciation or lease payments, maintenance and repairs, tires, the cost of gas, oil, insurance, and license and registration fees. Those expenses are totaled each year and deducted in accordance with the business use of the car (if the car is used for personal and for business use, the costs must be pro-rated).

In contrast, the “standard mileage rate” is a fixed rate per mile driven exclusively for business. Those costs (maintenance, gas, etc.) are all rolled into this fixed rate. There are some exceptions: the taxpayer must own or lease a car when using the standard mileage rate. The costs of maintaining cabs and limos, or other cars for hire, cannot be computed using the standard mileage rate, nor can you claim it for the costs of five or more automobiles owned or leased by a taxpayer and used simultaneously (such as in fleet operations).

For 2010, you cannot use the standard mileage rate for business if you claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS; claimed a section 179 deduction on the car, claimed the special depreciation allowance on the car, claimed actual car expenses after 1997 for a car you leased, or if you are a rural mail carrier who received a qualified reimbursement.

However, it’s worth noting that beginning in the 2011 tax year (so, filing next year), a taxpayer may use the business standard mileage rate for vehicles used for hire, such as taxicabs. Also noteworthy for 2011, the standard mileage rates will be announced in a separate notice, which also provides the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate and the maximum standard automobile cost for automobiles under a FAVR allowance. This is because the IRS plans to discontinue publishing the standard mileage rate revenue procedure annually but will publish modifications as required – no more annual Rev Procs for mileage rates? I know, it’s bizarre.

The standard mileage rate for 2010 was 50 cents per mile for business miles driven. The standard mileage rate for 2011 is 51 cents per mile for business miles driven. It will, in all likelihood, be higher by the end of the year: as gas prices climb, expect the IRS to react accordingly.

You generally can use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. Yeah. You read that right.

To substantiate your mileage, keep a diary of the miles driven for business, annotated with the purpose of the business. The more info, the better. You can also use an app for your smartphone or other web-based program like BizMile Tracker.

Keep in mind that both timing and ownership are important when deciding which method to use. If you want to use the standard mileage rate and you own the car, you have to claim it in the first year the car is available for use in your business; in later years, you can claim either the standard mileage rate or actual expenses. However, if you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. No matter which option you choose, you must make the choice by the due date (including extensions) of your return and you cannot revoke the choice.

Of course, no matter which method a taxpayer opts to use, parking fees, tolls, interest and taxes are separately deductible. Be sure and keep good receipts to substantiate those costs.

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{ 4 comments… read them below or add one }

1 Sue Wyatt March 5, 2011 at 2:19 pm

Hello!
My husband and I volunteer with AARP Taxaide. We have a question regarding the standard mileage and valid commuting expenses. For an example I’ll use a self employed woman who cleans rental homes. She travels 20 miles one way to a main office to get her cleaning assignments for the day. Then she travels a few miles to each rental home. Following the guide in the IRS/AARP manual 4012, pg D-5 (in case you have access to the book) “Most employees and self employed persons can use this chart”. “Home” to “your main or REGULAR place of work are personal commuting expenses” and are not deductible. In essence, only the miles to the individual rental homes can be counted as an expense not the miles to the main office. Is this your understanding?

Thanks! Enjoy your articles immensely!

2 Mary Kay Foss March 6, 2011 at 4:10 pm

Hello Sue:
That’s my understanding also. The self-employed person counts mileage from the first stop of the day (where she gets her assignments) to the various houses. The trip from the last house back home is also considered “commuting” following the IRS definition.

If she was self-employed and received her assignments at home (via phone or email) then each trip would be 100% business because her home would be the regular place of business.

3 Kelly March 6, 2011 at 8:47 pm

I would agree with Mary Kay.

4 Sue March 7, 2011 at 3:41 pm

Sounds like we are all on the same page … thanks for the confirmation!

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