Higher gas prices are prompting
many taxpayers to reconsider whether they should use the standard
mileage rate in figuring their deduction for business use of a
vehicle. Although the IRS took the unusual step of raising the 2005
mileage rate from 40.5¢ to 48.5¢ per mile for the last four months
of the year, in many cases using the actual expense method may
result in a bigger deduction.
Standard
Mileage Rate
When
you use the standard mileage rate, you don’t deduct the actual costs
of operating the car, such as gasoline, oil, insurance, repairs, and
maintenance. Nor do you claim a deduction for depreciation or lease
payments. Instead, the deduction is figured by multiplying the
number of business miles you’ve driven by the applicable rate.
(Parking and tolls are separately deductible.)
Example.
Cecilia drove her car 13,560 miles for business in 2005 — a total of
10,040 miles during the first eight months of the year and 3,520
miles during the last four months. Using the standard mileage rate,
Cecilia’s deduction is $5,773, figured by multiplying 10,040 miles
by 40.5¢ and 3,520 miles by 48.5¢ and adding the results.
Using the standard mileage rate
is simpler because you don’t have to keep records of actual auto
expenses. However, you must keep accurate records of your business
mileage.
Actual
Expenses
With the actual expense method,
deductible expenses include gas, oil, repairs, tires, insurance,
registration fees, and garage rent. You should keep a detailed log
of the expenses (including dates, descriptions, and amounts paid)
plus supporting documentation, such as receipts or bills marked
“paid,” for expenditures of $75 or more. You also may deduct
depreciation.
If you use your auto for both
personal and business purposes, you’ll need to keep track of the
actual mileage for each purpose. Do this by recording the car’s
odometer reading at the beginning and end of the year, and at the
beginning and end of each business trip. (Note that commuting
between home and office is generally considered personal, not
business, use.)
At the end of the year, the
business mileage divided by the total mileage determines the
percentage of business use. Applying this percentage to the year’s
auto expenses produces the tax-deductible amount.
Example. In
2005, Lou drove the car he bought in 2004 13,560 miles for business,
the same number of business miles Cecilia drove, and he put a total
of 15,953 miles on the car. The business-use percentage for Lou’s
car is 85% (13,560 ÷ 15,953). Lou spent $1,732 on gas, $100 on oil
changes, $475 on maintenance, and $2,300 on insurance. Lou may
deduct 85% of these expenses ($3,916), plus depreciation of $4,080,
for a total deduction of $7,996 — about $2,200 more than Cecilia can
deduct.
Do a Comparison
If you have appropriate records,
you may want to compare your deduction under both methods and use
whichever method is more favorable. Unless the car is leased, you
can switch from using the standard mileage rate to the actual
expense method. But you usually can’t do the reverse. Once you’ve
claimed accelerated depreciation for a car under the actual expense
method, the IRS won’t let you compute your deduction for the same
car using the standard mileage rate.
Pretax
contributions have long been one of the benefits of saving for
retirement in a 401(k) plan. With pretax contributions,
the salary you contribute to the plan is not immediately taxable.
This benefit allows you to set aside more money than you would if
you paid income taxes first, then put the amount remaining after
taxes into your savings. Pretax contributions and related investment
earnings are taxable when distributed
from the plan, unless you roll the money into another eligible plan
or an individual
retirement account (IRA).
