Lots of people are curious about the IRS-Approved shortcut for business driving and if the shortcut should be taken or not. This article from Accountingweb.com could help you decide.
The IRS imposes strict record-keeping requirements for taxpayers who use their vehicles for business driving. But at least you can avoid some of the hassle if you use the shortcut approved by the IRS. The question is: Does it make sense to do it on your tax return?
Frequently, the answer is “no.” You may find that you’re entitled to a bigger write-off – sometimes, much bigger – if you’ve kept all the records required under the tax law.
For starters, if you use your vehicle for business travel, you generally have a tax return choice: deduct actual expenses or use the IRS standard mileage rate.
With the actual expense method, you can write off actual expenses attributable to business travel – such as gas, oil, tires, insurance, repairs, licenses, registration fees, etc. – plus a depreciation allowance based on business use.
For example, if you use your car 80 percent for business, you can claim a depreciation for 80 percent of the usual depreciation allowance under the IRS table. Plus, you may be entitled to 50 percent “bonus depreciation” for a vehicle placed in service in 2016.
Note that annual depreciation deductions are limited by the “luxury car” rules that actually apply at moderate cost levels. The maximum first-year deduction for a passenger car placed in service in 2016, including bonus depreciation, is $11,160 (or $3,160 without bonus depreciation). Therefore, a depreciation deduction based on 80 percent use is $8,928.
The main drawback to the actual expense method is that you must account for every expense you incur and keep detailed records of every business trip. That’s more grunt work than some taxpayers are willing to do.
Alternatively, you might opt to use the standard mileage rate for 2017 of 53.5 cents per business mile, plus related tolls and parking fees. If you use this method, you don’t have to account for all of your actual expenses, although you still must record the mileage for each business trip, the date, the destination, the names and relationships of the business parties, and the business purpose of the travel.
The standard mileage rate is generally available to most taxpayers, but it cannot be used in some situations. For instance, you can’t use the standard mileage rate if you’ve claimed the usual depreciation allowance for the vehicle in the past.
To see what kind of difference the two methods can make, consider this hypothetical example. Suppose that you drove 12,000 business miles in 2016. If you have all the necessary records, you would have been entitled to a $4,000 depreciation allowance, and your actual expenses for the vehicle work out to 50 cents per mile.
Based on these facts, your deduction with the standard mileage rate is equal to $6,480 (54 cents x 12,000 miles). Conversely, using the actual expense method, your deduction amounts to $10,000 (50 cents x 12,000 miles + $4,000 depreciation) – or $3,620 more! And the disparity would be even greater in a year in which you’re entitled to bonus depreciation.
Even if it provides a bigger deduction, it’s too late to use the actual expense method on your 2016 return if you’re unable to provide the records needed to support the claim. But you might adopt this approach going forward in 2017 if you expect to be driving about the same number of miles.
This article was written by Ken Berry who is a nationally known writer and editor specializing in tax, financial, and legal matters.
