Vehicle Costs

People are always asking which is better to use for tax deductions, the IRS’s standard mileage rate (36.0 cents for 2003) or the actual expenses, which are prorated based on the business miles driven compared to the total for the year.   My advice has always been to keep track of the actual expenses during the year.  Then, when preparing your tax return, use whichever results in the higher deduction.  Contrary to what many believe, if straight line depreciation is used, it is possible to switch back and forth between methods in different years.  It is also true that the calculation method used for each vehicle stands on its own.  You can have one vehicle using the standard rate method at the same time as another vehicle is using its actual expenses on the same tax return. 

I have seen every possible variation imaginable in regard to which is the higher deduction. For example, with many of our clients who are real estate agents with annual business mileage of 40,000 to 50,000, the standard rate now frequently gives a higher total deduction than the actual expenses.  This became more consistent a few years ago when IRS changed the standard rate to be the same for all business miles, rather than its previous policy of the maximum rate for the first 15,000 miles and a much lower rate for additional miles.

When calculating its official standard rate, the IRS has just one opinion of what the costs are to own and operate a vehicle.  AAA just released its study concluding that the average vehicle cost is 51.7 cents per mile to operate.  Every year, car rental companies, such as Hertz, put out press releases claiming that it costs well over a dollar per mile to operate.  Considering their obvious motivation for trying to justify their rental rates, I would have more faith in the AAA being a bit more objective in their calculations. 

There really is no universal cost that applies to all kinds of vehicles.  For example, our three Toyotas cost us almost nothing for repairs, while most clients pay thousands per year in maintenance costs.  That is why it is so important, as I have been stressing for so long, to use QuickBooks to capture all possible information on costs paid through checks, credit cards, and actual cash in order to do a valid comparison with the IRS standard rate.

KMK

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This is not the way to get your things together for your tax preparer.  It would be much easier to crunch the numbers if things were set up on QuickBooks, which we are appreciating even more right now, as we work on 100+ extensions.

As an overloaded CPA who barely has time during Tax Season for anything personal, such as sleeping, I have always felt it was the absolute worst time of the year to have us lose a precious hour of time and wondered why it couldn’t be at the end of April rather than the beginning.