Auto deductions – the standard mileage rate method

You can deduct the cost of business use of your car using one of two methods: the actual expense method or the standard mileage rate method.  The actual expense method usually gives bigger deductions in the year of acquisition. The standard mileage rate method may be simpler to use for some taxpayers. This post looks at the standard mileage rate method.

Only business use is deductible

First note that you can only deduct the use of your car for your trade or business, or as an employee.

• Personal miles aren’t deductible.
• Commuting miles – the miles driven from your home to your regular workplace and back – generally aren’t deductible. Rules for special situations include:
  • If your qualifying home office is your primary place of business, you can deduct miles from your home to a client’s location or other business destination.
  • If you have no regular office and no home office, the miles from your home to your first contact, and miles from your last contact back to your home, are considered nondeductible commuting miles.
  • If you work at two places in the same day, you can deduct the miles between the first and second location, whether or not they are for the same employer.
  • You can’t take a deduction to the extent that your employer reimburses you for the trip.

Who can use the standard mileage rate method

To be eligible to use the standard mileage rate method:

• You must own or lease the car,
• You cannot operate five or more cars at one time,
• You must not have claimed a Section 179 deduction on the car,
• You must not have claimed “bonus” depreciation or accelerated depreciation on the car,
• You must not have claimed actual expenses for a car you lease, and
• You cannot be a rural mail carrier who received a “qualified reimbursement.”

For a car you own, you must choose to use the standard mileage rate method in the first year the car is available for use in your business. In subsequent years, you can choose to switch to the actual expense method.

Tip: In the first year of business use, ask your accountant to try both methods and determine which one yields the bigger deduction.

For a car you lease, if you choose the standard mileage rate method, you must use it for the entire lease period, including renewals. You cannot switch to the actual expense method for a leased vehicle.

You cannot use the standard mileage rate method for a vehicle for hire, such as a taxi.

Amount of the deduction

The amount of the deduction is calculated by multiplying the number of business miles by the rate in effect for the period. The rate for 2014 is 56 cents per mile. The rate for 2013 is 56.5 cents per mile.

Recordkeeping

To claim a deduction using the standard mileage rate method, you should keep a contemporaneous log showing:

• Date of travel,
• Number of miles, and
• Business destination and purpose.

You should also record the number of personal and commuting miles. Although these aren’t deductible, you must enter them on Schedule C or Form 2106.

Tip: In the first year of business use, keep actual expense records too so you can determine which method yields the bigger deduction.

How to claim the deduction

Self-employed individuals

The deduction is entered on Line 9 of the 2013 Schedule C. Additional information, such as a breakdown of total miles driven, must be entered on Lines 43 – 47.

Employees

Employees enter the deduction for mileage on Line 22 of the 2013 Form 2106. Additional information must be entered on Lines 11 – 21. Reimbursements from employers under an accountable plan are entered on Line 7. The net deduction (if any) flows to Schedule A of Form 1040. The deduction is reduced by 2% of your adjusted gross income.

Tip: You cannot claim unreimbursed employee mileage expense if you use the standard deduction.

Corporations and partnerships

Corporations (including S corporations) and partnerships generally use the actual expense method for vehicles which they directly own or lease. They can deduct reimbursements made to employees under an accountable plan as an Other Deduction on their income tax return.

Example

Kevin is an employee working as a salesman. He is expected to cover his own transportation costs and receives no reimbursement from his employer. In 2013 Kevin kept a daily log of his driving and recorded the following miles:

• Commuting miles – 3,600
• Business miles for sales calls – 9,800
• Personal miles – 2,400

Kevin itemizes deductions and had adjusted gross income (AGI) of $64,000. He has no other business expenses. Kevin completes his tax forms as follows:

1. He enters information on the vehicle and miles driven on Form 2106, Lines 11 – 21.
2. He calculates his mileage deduction: 9,800 business miles X $.565 = $5,537, and enters $5,537 on Line 22 of Form 2106. The $5,537 also flows to Lines 1, 6, 8, 9, and 10 of Form 2106.
3. He enters $5,537 on Line 21 of Schedule A (Form 1040).
4. He calculates the AGI reduction:  $64,000 AGI X .02 = $1,280, and enters $1,280 on Line 26 of Schedule A.
5. He calculates his deduction: $5,537 – $1,280 = $4,257, and enters $4,257 on Line 27 of Schedule A.

Other considerations

If you use the standard mileage rate method, you cannot deduct actual expenses, including:

• Depreciation and Section 179
• Gas and oil
• Repairs
• Insurance
• Lease payments
• Repairs and maintenance
• Registration fees

However, you can deduct tolls and parking fees.

If you use more than one car for business purposes (but fewer than 5 – see above), you can have some on the actual expense method and others on the standard mileage rate method. You do not need to use the same method for all your vehicles.

Although you can switch from the standard mileage rate method to the actual expense method, the depreciation calculations can be complex – please consult your tax advisor.