Now that we’re near the midway point of the year, you may think that the die has been cast for business drivers: If they’ve been keeping records based on the standard mileage rate, they’re stuck with it for the rest of 2014. But that’s not necessarily true. It may not be too late to switch to the actual expense method…in fact, you might even recommend it to some of your clients.
First, let’s recap the basic rules. Generally, a taxpayer who uses his or her own vehicle for business driving can deduct certain costs by using either the actual expense method or the standard mileage rate.
Actual expense method. As the name implies, the taxpayer deducts the actual expenses attributable to business driving. This includes the proportionate share of oil, gas, repairs, insurance, registration, tires, and so on, as well as a deprecation deduction under the applicable tax rules. (Currently, bonus depreciation isn’t available for vehicles placed in service after 2013, but anticipated legislation could change that.) Taxpayers who lease the vehicles instead of owning them can deduct the appropriate percentage of the monthly leases, but must report an inclusion amount on their tax returns.
Standard mileage rate. Alternatively, a taxpayer may deduct business vehicle using the IRS-approved mileage rate. This rate, which is adjusted annually, is based strictly on business miles traveled and includes a built-in depreciation component. For travel in 2014, the standard mileage rate is 56 cents per business mile (plus business-related parking fees and tolls), a slight reduction of the 56.5 cents per mile rate for 2013.
The main advantage of the standard mileage rate is convenience. Although taxpayers must still keep detailed records of business trips, they don’t have to account for every last penny spent at the gas pumps or in service departments. It’s no muss, no fuss. But the extra hassles under the actual expense method often result in a bigger deduction, even if the taxpayer doesn’t start keeping the necessary records until halfway through the year. This is especially true if the actual expenses are high (e.g., the taxpayer incurs significant repairs) or the mileage is extremely low.
For a hypothetical comparison, assume that a taxpayer drives 10,000 business miles in a car placed in service in 2014. If the taxpayer incurs, say, $5,000 in actual expenses and can claim a depreciation allowance of $2,500 (the maximum allowance is $3,060 for 100% percent business use), the total deduction comes to $7,500. In this case, the deduction using the standard mileage rate would be only $5,600 (56 cents x 10,000), or $1,900 less than the deduction with the actual expense method. Of course, the figures will vary in any given situation, but you get the idea.
Usually, you can switch from the standard mileage rate to the actual expense method without any problem. Be mindful, however, that most taxpayers can’t switch from the actual expense method to the standard mileage rate if they deducted actual expenses in the prior year. For example, the standard mileage rate isn’t available if you claimed a Section 179 deduction or accelerated depreciation for the vehicle in 2013. Finally, if you started using the standard mileage rate for a leased car, you can’t switch to the actual expense during the lease term. Keeping those points in mind, advocate the best method for each one of your business clients.