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The Ins and Outs of Deducting the Business Use of Your Vehicle

Posted Jun. 30, 2005

In the United States, the average citizen spends more of their disposable income on automobiles than anything else except lodging. It has been estimated by the American Automobile Association that the average costs of owning and operating a motor vehicle during the course of an individual's expected driving lifetime of 50 years amount to $240,000 or more, depending on the size of vehicle one drives.

The costs of driving large sedan cars for the entire 50-year period will add up to near $350,000. Even though during the period of 1990 to 2002, when the average expenditure for a new car increased from $14,400 to $21,400 (Consumer Price Index), when car prices are adjusted for added features and quality improvements, new car and truck prices today are near 1993 prices. However, we know that this is not true for the costs of operating a vehicle. Automobile insurance costs and maintenance and repairs have increased at a fast pace, not to mention the substantial increase in fuel prices. When you use a car or truck in your business, whether it is production agriculture or selling and installing air conditioners, what options do you have to deduct the costs incurred in owning and operating the vehicle?

The Internal Revenue Service (IRS) offers business owners a choice of two methods by which they can deduct the costs of owning and operating a vehicle for business use. The two methods are the standard mileage rate and actual costs. Actual costs include both operating and fixed costs. Fixed costs include such items as depreciation, license and insurance. Operating costs would include maintenance and repairs, fuel and oil, tires, batteries and interest if a loan exists on the vehicle used for business purposes.

The business standard mileage rate for 2005 is 40.5 cents per mile. This method can only be used if it is elected in the first year the automobile is placed in service for business use. Once the standard mileage rate has been used, the business owner may choose in subsequent years to use either the standard mileage rate or actual expenses. In addition to the business standard mileage rate, the IRS allows a standard mileage deduction for miles driven for charity work, medical reasons or moving. A business owner cannot use the standard mileage rate if more than four automobiles are used in the business at the same time.

Many business owners are aware of the Section 179 expensing option. This section of the code allows a taxpayer to deduct, or "expense," up to $105,000 in 2005 of depreciable business asset purchases. The deduction is limited to the taxable income generated from the business. Without electing this option, the purchase price of these assets would be deducted as depreciation over a three-year, five-year or longer period, depending on the assigned life of the asset. The Section 179 election also applies to some automobiles. The key factor that determines if an automobile qualifies is whether the rated gross vehicle weight (GVW) is over 6,000 pounds and the vehicle is used more than 50 percent for business purposes. Many farm pickups have GVW ratings above 6,000 pounds, including an extended cab one-half ton. A word of caution ? the standard mileage rate cannot be used to deduct annual automobile costs if the taxpayer elects the expensing option on a qualifying automobile.

The IRS requires any taxpayer to substantiate by adequate records the business use of most cars and trucks. Such automobiles as take-home police and fire vehicles, any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds and flatbed trucks are not subject to substantiation requirements. How does one substantiate business use? Adequate records can include an account book, driving log, statement of expense or trip sheets. The records should provide information related to the amount of each expense or mileage driven, the date and place of the expenditure or use of the vehicle and the business or investment purpose for the expense.

Admittedly, few farmers and ranchers keep these types of records. Two alternatives exist. One is that the IRS does allow substantiation by sampling. A business owner can maintain an adequate record for a portion of a taxable year and use that record to prove the business use for the entire year. It is necessary that the portion of the year when business use was recorded represents the use for all of the taxable year. The sample period could be every other month or as little as one fourth of the year. The other alternative to keeping adequate records year around is to elect to use the Safe Harbor Rule. There is a Department of Treasury Regulation that allows a taxpayer who uses a vehicle during most of a normal business day directly in connection with farming to claim a business deduction based on 75 percent business use. This has been a popular rule with many farmers and ranchers since it alleviates the need to keep adequate records.

Which method is the best to use to deduct the expenses associated with the business use of a vehicle? No one answer is correct for everyone. It is my opinion that, for many farmers and ranchers, keeping adequate records and deducting 100 percent of actual expenses will net the greatest deduction over time. The reason is that many of the miles driven by farmers and ranchers are "hard" miles ? stop and go feeding, bumpy pasture roads, muddy conditions in the winter or towing a trailer. This type of vehicle use causes higher fuel consumption and more maintenance and repairs. However, the best answer to the question of which method is best is this: Keep sufficient records each taxable year so you or your tax preparer can calculate the deduction for each method and choose the one best suited to your individual situation.

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