Standard Mileage Rate Simplifies Auto Records and Deductions

There are two IRS-authorized methods for computing car expenses for local transportation or travel away from home:

• the standard mileage rate method (40.5 cents per mile

• for 2005), and

• the actual cost method.

Generally, you can use the method that generates the largest deduction.  The IRS annually updates the standard mileage rate to account for changes in automobile costs.

Restrictions on use of standard mileage rate.  The actual cost method is available for use by any taxpayer.  The standard mileage rate can be elected only by self-employed individuals or employees and can be used for passenger automobiles, including vans, pickups or panel trucks and can be used for leased as well as purchased autos.

The standard mileage rate is subject to the following limitations:

• The standard mileage rate cannot be used if the car has been previously depreciated using a method other than straight-line (SL).

• The taxpayer may change from the standard rate method to the actual cost method, but must then use SL depreciation for the automobile’s remaining estimated useful life.  When the standard rate method is used for leased vehicles, it must be used for the entire term of the lease.

• The standard mileage rate cannot be used if you used two or more cars simultaneously in your trade or business. 

What does the standard mileage rate cover?  It is in lieu of operating and fixed costs of the automobile.  This includes items such as depreciation (or lease payments), maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insurance and registration fees.

Parking fees and tolls attributable to business use of the automobile may be deducted as separate items as well as business interest attributable to the purchase of the automobile.

When does using the standard mileage rate method make sense?  Many self-employed taxpayers will find that the actual cost method results in the largest auto tax deductions.  This is particularly true for more expensive automobiles, or for vehicles requiring a high degree of maintenance.

Recordkeeping of Business Use
You must be prepared to substantiate auto deductions with adequate records or sufficient evidence, either written or oral. 

• The amount of each expenditure for the vehicle, including purchase price, vehicle improvements, lease payments, repairs and maintenance, gas and other expenses,

• The total mileage on the vehicle each year and a breakdown of the business, personal and commuting miles, and

• The date of each expense or use, and the business or investment reason for each expense or use of the vehicle.

Records should be maintained in an account book, diary, log, trip sheet or similar record.  Without a written record of business or investment mileage, you will have to convince an IRS agent through oral testimony alone. 

The information presented in the Tax Newsletter is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly, cannot be regarded as legal or tax advice. Please contact your tax advisor for more information on the subject and how it pertains to your specific situation.

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Last Modified:  December 31, 2012