 Standard
mileage rate vs. actual expenses
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 Dear
Tax Talk,
Please explain depreciation of automobile assets and its impact,
if any, on mileage rate expenses for a sole proprietor.
-- Mike
 Dear
Mike,
When you use your car for business purposes,
you can choose to either claim a standard mileage rate or actual
expenses. The standard rate is a per-mile amount set annually by
the Internal Revenue Service and is in lieu of claiming gas, insurance,
repairs, depreciation and other incidental expenses.
You can claim interest expense
if the car is financed, plus tolls and parking, in addition to the
standard rate. The standard rate for 2005 was 40.5 cents per mile
through Aug. 31, 2005, when the IRS increased it to 48.5
cents for the remaining four months of 2005 due to the sharp
rise in gas prices. Next year's rate might not be set until January.
You cannot use the standard mileage rate on any car
on which you claimed accelerated depreciation. Hence, if you choose
to use actual expenses on the car in the first year, you won't be
able to use standard mileage rates in a later year. Accelerated
depreciation is the method used to recover the actual cost of the
car.
In 2004, there was a special allowance that allowed
you to claim generally up to about $10,610 in depreciation on a
new passenger car. It was $300 more for a sport utility vehicle
that had a gross vehicle weight rating of less than 6,000 pounds.
Certain larger SUVs had additional advantages. Electrical vehicles
also have higher limits. In 2005 these limits are substantially
curtailed due to the expiration of bonus depreciation. The limit
in 2005 is $2,960 for a passenger car and $3,260 for a light truck
or SUV. All these amounts include the Section 179 allowance that
allows a business to write off certain equipment in the year of
purchase.
All these limits are further reduced by the
nonbusiness use of the automobile. For example, if you use the car
10,000 miles a year of which 6,000 is for business, you're entitled
to 60 percent of $2,960, or $1,776, in depreciation. When you're
looking at a $30,000 car, you can see you won't be getting much
tax benefit for the cost of the car. However, if you pay a lot for
automobile insurance and repairs, actual expenses still might make
sense, especially if you have low mileage.
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