Compare actual expenses with flat-rate method
Did you use your vehicle for business driving in 2016? Generally, you can deduct expenses on your tax return in one of two ways: the actual expense method or the IRS-approved standard mileage rate. Here is a brief comparison:
1. Actual expense method: As the name implies, you can deduct actual expenses attributable to business use of the vehicle, including gas, oil, tires, insurance, repairs, licenses, registration fees and so on. Also, you may claim a depreciation deduction for the vehicle, based on the percentage of business use. For instance, if you use an automobile 80% for business use, you are entitled to a depreciation deduction of 80% of the allowable amount.
Although the annual depreciation deductions are limited by “luxury car” rules, there is an extra tax reward for clients who placed a vehicle in service in 2016. Due to the Protecting Americans from Tax Hikes (PATH) Act of 2015, you can claim 50% “bonus depreciation,” effectively adding $8,000 to a first-year depreciation deduction. Under the PATH Act, the maximum first-year deduction for a passenger vehicle for 2016 is $11,160. (As of this writing, the figure for 2017 has yet to be announced.)
However, if you use the actual expense method, you must account for every single expense incurred, as well as maintain detailed records for every business trip. This includes the mileage for each business trip, the date of the trip, the destinations, the names and relationships of the business parties involved, and the business purpose of the travel.
2. Standard mileage rate: Alternatively, you can use the standard mileage rate approved by the IRS. This figure is updated every year. For 2016 returns, the flat rate is 54 cents per business mile, plus related tolls and parking fees. (It decreases to 53.5 cents per business mile in 2017.)
With this method, you do not have to account for all your actual expenses, but you still must keep records of the mileage for each business trip, the date, the destinations, the names and relationships of the business parties, and the business purpose of the travel. Finally, the standard mileage rate cannot be used if you
- operate cars for hire (e.g., taxis and limos);
- use five or more cars at a time (e.g., fleet operations);
- have claimed an accelerated depreciation deduction for the vehicle in the past;
- have claimed a Section 179 deduction for the vehicle in the past;
- have claimed actual expenses after 1997 for a vehicle that is leased; or
- are a rural mail carrier who has received a qualified reimbursement.
The actual expense method will often produce a larger deduction, especially if you drive few business miles during the year, because you benefit from the depreciation allowance based on business use. But you must have the records needed to support your claims.
Have your professional tax adviser help you crunch all the numbers. The difference can amount to hundreds or even thousands of tax dollars on your 2016 return.