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The IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will be 37.5¢ for business travel after 2003. That's a 1.5 cent increase from the 36¢ allowance for 2003 business travel. Also after 2003, businesses will be able to use the mileage allowance if they use 4 or fewer autos for business simultaneously (currently, it's restricted to one business auto).
Simplified deduction method. The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, claim separate deductions for parking fees and tolls connected to business driving.
After 2003, the standard mileage rate may not be used for a purchased auto if:
... it was previously depreciated using a method other than straight-line for its estimated useful life;
... a Code Sec. 179 expensing deduction was claimed for the auto;
... the taxpayer depreciated it using MACRS under Code Sec. 168; or
... the vehicle is used for hire, such as a taxicab.
Also after 2003, the standard mileage rate can't be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously (such as in fleet operations).
A taxpayer who uses the mileage allowance method for an auto he owns may switch in a later year to deducting the business connected portion of actual expenses, so long as he depreciates it from that point on using straight line depreciation over the auto's remaining life. Leased autos may also use the standard mileage rate only if that method (or a FAVR allowance method) is used for the entire lease period (including renewals). If the lease period began before '98, this rule applies only for the post-'97 portion of the lease period (including renewals).
Other business mileage rate rules. For 2004, the depreciation component of the mileage rate remains unchanged from 2003 at 16¢ a mile (it was 15¢ for 2002 and 2001, and 14¢ for 2000). The depreciation component reduces the basis of the auto for gain or loss purposes.
Advantages of using standard mileage rate. For those taxpayers eligible to use it, the standard mileage rate offers the following advantages:
... Mileage rate users need not keep a record of actual expenses, or retain receipts where required. A record of the time, place, business purpose and number of miles traveled suffices.
... If an auto's business expenses are deducted via the mileage rate, it is not subject to the Code Sec. 280F dollar caps, or the special rules that apply if qualified business use does not exceed 50% of total use.
... The mileage rate method may yield bigger deductions than the actual expense method, if the driver's business mileage is high, his auto is not eligible for the bonus first-year depreciation allowance (e.g., he bought it used) and it is a thrifty, high-mileage model.
Disadvantages of mileage rate method. The mileage rate method may produce a smaller deduction than would be obtained by claiming actual business-connected operating expenses plus depreciation (or lease payments). That's particularly true if the auto is eligible for a bonus first-year depreciation allowance under Code Sec. 168(k). Also, use of the mileage rate method prevents the taxpayer from claiming regular MACRS deductions (subject to the luxury auto dollar caps) for the auto in later years. The majority of taxpayers who are eligible to use the mileage allowance in 2004 probably will be better off forgoing it and deducting actual expenses plus depreciation if they buy new autos and use them more than 50% for business use. Under the bonus first-year depreciation allowance rules applicable to business autos, first-year depreciation on a new auto bought and placed in service in 2004 can be as high as $10,710 ($11,010 for trucks and vans).
Other applications of mileage allowance method. Employers that require employees to supply their own autos may reimburse them at 37.5¢ a mile for employment-connected business mileage during 2003, whether the autos are owned or leased. The reimbursement will be treated as a tax-free accountable-plan reimbursement if the employee substantiates the time, place, business purpose, and mileage of each trip.
In addition, for 2004, the rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 14¢ a mile (it is 12¢ a mile for 2003). The mileage rate for driving an auto for charitable use during 2003 will remain unchanged at 14¢ a mile.
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