Standard mileage rate or actual mileage rate which is better for you?
As gasoline prices have climbed in 2011, many taxpayers who use a vehicle for business purposes are looking for the IRS to make a mid-year adjustment to the standard mileage rate. In the meantime, taxpayers should review the benefits of using the actual expense method to calculate their deduction. The actual expense method, while requiring careful recordkeeping, may help offset the cost of high gas prices if the IRS does not make a mid-year change to the standard mileage rate. Even if it does, you might still find yourself better off using the actual expense method, especially is your vehicle also qualifies for bonus depreciation.
Two methods
Taxpayers can calculate the amount of a deductible vehicle expense using one of two methods:
• Standard mileage rate
• Actual expense method
Under the standard mileage rate, taxpayers calculate the amount of the allowable deduction by multiplying all business miles driven during the year by the standard mileage rate. One of the chief attractions of the standard mileage rate is its ease of use. Taxpayers do not have to substantiate expense amounts; however, they must substantiate business purpose and other items. There are also limitations on use of the business standard mileage rate. The standard mileage rate for 2011 for business use of a vehicle is 51 cents-per-mile. UPDATE: The IRS has announced an increase in the optional standard mileage rate for the final six months of 2011 to 55.5 cents per mile.
At this time, it is unclear if the IRS will make a similar mid-year adjustment in 2011. IRS officials generally have declined to make any predictions. If the IRS does make a mid-year change, it will likely do so in late June, so the higher rate can apply to the last six months of 2011.
Actual expense method
Rather than rely on a mid-year adjustment from the IRS, which might not come, it’s a good idea to compare the actual vehicle costs versus the business standard mileage rate. Taxpayers who use the actual expense method must keep track of all costs related to the vehicle during the year. The cost of operating a vehicle includes gasoline, repair and maintenance costs, cleaning, tires, depreciation, interest on a vehicle loan, and insurance.
“Doing the math” this year in weighing whether to take the actual expense method not only should factor in the cost of gasoline but also what depreciation or expensing deductions you will be gaining by using the actual expense method. Enhanced bonus depreciation and enhanced “section 179″ expensing for 2011 can increase your deduction for a newly-purchased vehicle in its first year tremendously if the actual expense method is elected.
Switching methods
Once actual depreciation in excess of straight-line has been claimed on a vehicle, the standard mileage rate cannot be used for the vehicle in any future year. Absent that prohibition (which usually is triggered if depreciation is taken), a business can switch between the standard mileage rate and actual expense methods from year to year. Businesses that switch methods now cannot make change methods effective in mid-year; you must apply one method retroactively from January 1.
Our office will keep you posted of developments. If you have any questions about the actual expense method or the business standard mileage rate, please contact our office.