Claiming the Standard Mileage Rate

Claiming the Standard Mileage Rate

Claiming the standard mileage rate for an automobile on your taxes takes a little record keeping. Some taxpayers hope to avoid that hassle by claiming actual expenses, instead. Truth be told, even more record keeping is necessary with the actual expense method, and you must keep mileage records either way. These records will not be filed with your taxes, but must be available for review in the case of an audit.

If you use your vehicle for obtaining inventory or supplies for your business, you may deduct the business percentage of your automobile expenses. The first step is to record your mileage. Make a habit of writing down the odometer reading on January 1st each year. You may use a spreadsheet (like the PDF example shown here) or something as simple as a pocket calendar you keep in your glove box. Whatever the method, make sure to write it down. Record your starting mileage, ending mileage, where you went, and the purpose of your trip. Jot down your mileage on a scrap of paper if you have to. When you return home, you can fill in the remaining information on your spreadsheet. Total how many miles you drove for business only ─ round trip. The remaining miles used on your vehicle this year are either personal or commuting. Vehicles are considered listed property. Therefore, you must keep records denoting business use.

If your office is in your home, you will not have any commuting mileage. If, however, you work in an office on Main Street, instead of your home, the number of miles between your house, that location, and back again are your commuting miles. Write the number of business, personal, and commuting miles down in the appropriate blanks on Part IV of your Schedule C. You figure your total mileage for the year by subtracting your odometer reading on January 1st, from the odometer reading at the end of the year.

You may either claim the Standard Mileage Rate (SMR) or Actual Expenses, not both in the same year.

Standard Mileage Rate

Taking the standard mileage rate means you are able to deduct a certain amount for each business mile driven in a particular year (48.5 cents in 2007). You multiply the number of business miles driven by 48.5 cents per mile in order to figure your standard mileage deduction. This amount is figured in Part IV of your Schedule C, then deducted in Part II, line 9 of the same form. There are spaces to account for commuting and personal miles in Part IV, Schedule C, but those miles are not deductible.

You may also deduct the business percentage of parking fees and tolls, and the business percentage of state and local personal property taxes on the vehicle, in addition to the standard mileage rate. If you itemize your household deductions instead of taking the standard deduction, you may claim the remainder of your state and local personal property taxes on the vehicle on your Schedule A.

Example:
Dawn drove her car a total of 4530 miles this year. She drove her car 453 business miles this year. She multiplies that number by 48.5 cents (453 x 48.5 cents = $219.70). If she does not have any parking fees or personal property taxes to report on her car, she can simply carry the $219.70 to line 9 of her Schedule C.

If she does have parking and state and local personal property taxes on her car, Dawn will figure the business percentage she used her car by dividing the business miles by the total miles. (453 ÷ 4530 = 10%) Now, she will total her parking and state and local personal property taxes on her car, separately.

If she paid out a total of $150 in parking fees, she will figure 10% of that by multiplying 150 x 10%. Dawn will be able to deduct $15 in addition to the $219.70 for the standard mileage rate. She will then enter $234.70 on line 9, Schedule C.

If Dawn had a total of $200 in state and local personal property taxes for the vehicle, she will find her business percentage (200 x 10%). She may also deduct $20 on line 23 of her Schedule C.

If you want to use the standard mileage rate on a vehicle, you must choose it in the first year the automobile is available for use in your business. Then, in later years, you may choose to use either the standard mileage rate or actual expenses. If you switch from the SMR to actual expenses and want to deduct depreciation, however, you must use straight-line depreciation, as opposed to an accelerated method, estimating the remaining useful life of the car.

When the SMR is NOT allowed:
You may not deduct mileage on a car for hire (taxi).
You use five or more cars in your business at the same time.
You claimed an accelerated depreciation method in previous years on the same car.
You claimed a Section 179 deduction on the car.
You claimed actual expenses on a car you leased after 1997.
You are a rural mail carrier who received a qualified reimbursement
You claimed actual expenses on the same vehicle in the first year you used the automobile in your business.

Beware! When you sell the vehicle or switch to actual expenses for depreciation purposes, you will have reduce your basis by a certain amount (17 cents per mile deducted in years 2005 and 2006).

This and other information may be found in the book listed below.

Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com/

Copyright 2007 -2008

Depreciation ─ Choosing a Method

Depreciation ─ Choosing a Method

Depreciation is a way you are allowed to deduct the normal wear and tear of business assets (equipment, computer software, automobiles, office furniture, etc). You may claim an item which: you use in your business, wears out over time, AND has a useful life exceeding one year. Because the item is expected to wear out over time (longer than one year), time frames have been assigned to different classes of items, depending on how long that item is expected to be useful in your business. These time frames are called classifications or class life.

Some common classifications:

3 years: off the shelf computer software
5 years: cars, trucks, trailers, computers and peripherals, copiers, calculators
7 years: office furniture, fixtures, unclassified personal property
(See IRS Publication 946 for more detailed lists.)

When depreciating an item, you will need to choose both one method and one convention.

Methods:

Declining Balance─The General Depreciating System (GDS) is the standard, accelerated method of depreciation under MACRS. Using the GDS 200% declining balance (200DB) method (150% for 15 and 20 year property) means you get to deduct more of the item’s value in the early years of its recovery period.

Straight Line─The Straight-Line (S/L) method of depreciation allows you to deduct the value of your item equally over the recovery period.

Alternative Depreciation─The Alternative Depreciation System (ADS) uses the straight-line method of depreciation over a specified number of years. The recovery period for ADS is usually a little longer than used under general or straight-line depreciation methods. (Comparison charts found in the book.)

Choosing a Method

The year you purchase and put your item into use in the business is generally the first year you will take depreciation deductions. That first year is when you will choose what method of depreciation to use. It is standard to use the GDS 200% declining balance method for computing most of your business property. Sometimes, however, you are required to use a different method (usually when business usage is 50% or less on listed property).

You may generally elect to use either the ADS or Straight-Line method for business assets, instead of an accelerated method. The catch to doing so is you must make that election for all property of the same class life put into use in the same year.

Example: If Morgan made the election to depreciate her office desk (7 year property) using the straight-line method, she would also have to use the straight-line method for all other 7 year property purchased and put into use in the same year.

Once you choose a depreciation method, you need to stick with it for that particular item until it is fully depreciated (unless you are required to change, as with business usage dropping to 50% or less).

Listed Property
In order to use an accelerated method of depreciation for listed property, you must use the equipment more than 50% for business purposes. If you use the item 50% or less for business purposes, listed property must be depreciated using the Alternative Depreciation System.

If you initially use your listed property over 50% for business, but then in drops in a later year, previous accelerated depreciation deductions are subject to recapture. The amount recaptured is the amount previous deductions exceed the depreciation that would have been allowable under ADS. (See Chapter 8 of the book for a thorough explanation on recapture.)

This and other information may be found in the book listed below.

Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com

Copyright 2007 -2008

Listed Property - What It Is

Listed property consists of items the IRS considers having the potential for personal use. Computers, vehicles, and cell phones all fall into this category. For these items, you must keep detailed records of personal versus business use.

Just keep a notebook next to the computer, for instance. Whenever the item is in use, jot down when and for how long, and whether it was business or personal use. This may sound tedious, but during an audit, you will have to produce these records.

It is the very same concept as keeping mileage journals for your vehicle. In fact, because automobiles fall under listed property, it is why you have to keep mileage records.

If in doubt whether something is considered listed property, keep records. If you question whether or not the IRS thinks you could be abusing the tax deduction, they probably do, too. More explanation of which items are considered listed property is given in IRS Publication 946.

Note: In order to use an accelerated method of depreciation for listed property, you must use the item more than 50% for business purposes. If you use it 50% or less in the business, listed property must be depreciated using the Alternative Depreciation System (ADS).

This and other information may be found in the book listed below.
Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com