Higher Fuel Prices and the Business Auto Expense Deduction

In this article, I am going to be discussing the methods available for deducting auto expenses and suggest that you review now your own situation in light of higher fuel prices.

On July 1, 2008, the IRS raised the standard mileage rate from 50.5 cents to 58.5 cents for business travel from July 1, 2008 to December 31, 2008. Was this enough? Do you need to consider switching to the actual expense method to compute your vehicle expense deduction in 2008? This article will help you address these questions.

The two methods:

There are two basic methods that business taxpayers may choose from to compute their deduction for the business use of automobiles: the IRS’s the standard mileage rate method and the actual expense method. The method chosen in the first year the vehicle is placed into service is very important and it will affect whether a change in method can be made at a later date.

Standard mileage method – With the standard mileage rate method, the fixed costs and the operating costs of the vehicle are generally calculated by multiplying the number of business miles traveled during the year by the business standard mileage rate. The actual expenses for operating the vehicle are not included in this calculation, but the IRS does allow additional deductions for business-related parking costs and tolls, interest paid on vehicle loans and any state or local personal property tax paid on the vehicle. In addition, there are certain other limitations that need to be reviewed. One is that you cannot use this method if you have previously depreciated the vehicle using a method other than straight-line for its estimated useful life.

Actual expense method - With the actual expense method, taxpayers can deduct the operating and maintenance costs incurred for the vehicle during the current year. These include gas and oil, insurance, tires, license, registration fees, business-related parking costs, tolls, interest paid on vehicle loans, any state or local personal property tax paid on the vehicle, repairs, maintenance and car washes. In addition to this total, depreciation is added. Be sure to see the new rules for 2008 depreciation, because these have been changed. When the business use of the vehicle is less than 100 percent, expenses need to be allocated between business and personal use.

Changing methods

Businesses can switch between the standard mileage method and the actual expense method only if they have not claimed depreciation in excess of straight-line on the vehicle. No mid-year method change is allowed.

For more information on the standard mileage rates, you can go to IRS Announces 2008 Standard Mileage Rates; Rate for Business Miles Set at 50.5 Cents per Mile. For more information on depreciation for 2008, you can go to IRS To Issue Guidance on Special 50-Percent Depreciation Allowance

If you have any further questions, or would like me to answer a specific question, you can contact me at marty@martymcevoy.com.