Standard IRS Mileage: Two Examples
Example #1 - Using the Actual Expense Method for Car Expenses
Susan is a self employed interior designer. She started her business January 1, 2010 and began using her 2007 Toyota for business purposes at the same time. Her total mileage at year end was 10,000 miles, of which 8,000 miles were for business (8,000 /10,000=80%). Susan charged all her car expenses to one credit card (good tax tip!), so she knows exactly what they were; they add up to a total of $5,775, including depreciation expense. Susan also keeps a mileage log. To calculate her business car deduction using the Actual Expense Method, Susan calculates:
Total Actual Car Expenses x 80% =
$5,775 x .80 = $4,620Susan is curious what figure she would get if she used the standard IRS mileage rate instead of the standard IRS mileage deduction:
Total business miles x 2010 IRS Mileage Rate =
8,000 x .50 = $4,000
Because Susan had kept good records and had included all her actual expense receipts, her car deduction is higher by $600 using actual car expenses. She is in the 27% tax bracket and pays self employment tax (15.3%). This means that her tax savings using the actual expense method vs. using the standard IRS mileage rate is approximately $250. Should Susan use the actual expenses, or the standard IRS mileage rate? See my comments toward the bottom of this page.
Example #2 - Using The Standard IRS Mileage Rate
Bill is a self employed salesman. He just bought a new car that he will be using mostly for business. Bill is not very good at keeping records. In fact, he admits hat he can't stand the task. However, two years ago Bill's s tax return was audited by the IRS, so he understands that he has to keep at least some records. After he got audited, he tried to keep a mileage log of his business miles, but he managed to keep this up only for a couple of months. Going over the mileage log for those two months with his accountant, he found that he used his car for personal purposes only about 9% of the time. With this knowledge, he now uses the standard IRS mileage method to estimate his car expenses:
Bill always carries a diary planner where he books his sales appointments. At the beginning and end of the year, he writes the car odometer reading in his appointment book. Now he knows how many total miles he drove, and he has his oil change receipts to prove it. Since he knows that car usage patterns have not changed much since he got audited, he estimates that the business usage of his vehicle is still approximately 91% (100%-9% personal use).
At the end of each tax year, Bill subtracts the beginning odometer reading from the end reading. He multiplies this number by .91 (91%) to get his total business miles. All he then has to do is to multiply the business mileage with the standard IRS mileage rate for the tax year in question to get his car expense tax deduction. This is not a perfect system, but it works for Bill. He gets a fairly accurate estimate of his car expense deduction using the standard IRS mileage method. If the IRS audits Bill's future tax returns, they would want to see the detail of his business miles and will probably ask how he got up with the 91% business usage figure. Bill will show them that he has estimated his usage based on actual records kept over a two month period. He also has his appointment book with all his sales appointments and locations. If he gets audited, it would likely only take him a few hours to fill in the miles driven (to complete the records to where the IRS would accept them). Of course, this is not as good as keeping a current day to day mileage log, but it works.
Bill's accountant feel confident that the IRS would allow his auto deduction as long as Bill can demonstrate how he went about re-constructing his mileage. The standard IRS mileage method allows Bill to get his car expense deduction and still not worry too much about how he would defend it in an IRS audit. Granted, using the actual auto expense method might result in a higher tax deduction for bill, but Bill feels that for him, it is not worth the time and the hazzle.
Standard IRS Mileage - Examples Commentary
The two examples above show that people's circumstances and motivations differ from case to case. If you are very neat and organized, you may decide that the standard IRS mileage method is not for you. This is especially true if your actual car expenses are higher than average. Perhaps you spent a lot of money on car repairs, or you just bought a new vehicle that gives you a generous depreciation amount.
Just keep in mind, that if you are going to use the car in your business for a long time, using the actual expense method could make it more complicated to use the standard IRS mileage method in future years. If you tend to be more like Bill in Example 2 above, the decision to use the standard IRS mileage method appears to be a no-brainer. If you are not very good at record keeping, the standard IRS mileage rate is definitely a better choice. Bottom line: you are the person who knows your strengths and limitations. Therefore, only you can decide if using the standard IRS mileage method is right for you!
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