In the middle of summer, comes an unusual announcement from the Internal Revenue Service (IRS). As good news from the IRS is scarce, we want to share it with you.
What is the Good News?
In a rare move, the IRS increased the tax deduction in mid-year for using a private vehicle for business. Typically, these adjustments are only made in late fall and become effective the next calendar year.
This time, rising gas prices have sparked the increase, which went into effect on July 1. The increase of 4 ½ cents per mile raises the deduction to 55 ½ cents per mile. Obviously, rising gas prices are not a cause for celebration. However, the fact that the IRS is taking steps to relieve some of these negative effects will help to ease the pain for some drivers.
Business owners, outside salespeople and others who must drive their vehicles for business, welcome this news. Many times, employers use the standard deduction rate from the IRS as the basis for reimbursing employees who use personal vehicles for business purposes.
How Do I Use this New Deduction?
Please note that this midyear change will result in the need for additional calculations when figuring the annual deductions. For the first six months of the year, from January through June, you must use the old rate of 51 cents per mile to figure the deductible amount. Then, for the remainder of the year, July through December, the higher rate of 55 ½ cents should be used.
Do I Have to Use the New Rate?
No. You have the choice to use this method, called the standard deduction, or to itemize the actual expenses you incur in driving your vehicle for business purposes.
Using this standard deduction also allows you to deduct parking, tolls and the interest you pay on your auto loan. It does not allow you to deduct fines or parking tickets.
Using the Actual Expense Method
In this method, you simply deduct all of the expenses you have actually paid for the business portion of your driving. This can include gas and oil, repairs and maintenance, lease payments or depreciation, insurance and registration fees. Also deductible are parking, tolls and auto loan interest.
Which Method Should I Choose?
Either way, you must keep accurate and detailed records of mileage, date, destination and purpose of each trip in order to claim a deduction.
Whether you own or lease your vehicle, you are required to use the standard mileage rate for the first year. Later, if you own the vehicle, you may switch to the actual expense method if you wish.
The only way to determine which method is best for you is to keep accurate records of your business driving and all related expenses. Then, at the end of the year, you can determine which method will best serve you. A tax professional can help you choose and assist you in reporting properly.
Billeater wants to know: Which mileage deduction method will you choose? Billeater is a popular resource for information on how to save money.