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Maximizing Deductions for Business-Use Vehicles

By Peter Jason Riley

How would you like to squeeze more time out of your busy week, cut down on record-keeping duties, and reduce piles of paperwork and old receipts? The new 2008 standard mileage rates for business vehicles can help do just that. Businesses that operate up to four vehicles at the same time can deduct this standard mileage rate rather than keeping track of depreciation, gas, and repairs. The IRS estimates that U.S. small businesses will save 8 to 10 million hours a year by opting for the standard mileage deduction.

The standard mileage rates for 2008 are:

  • 50.5 cents-per-mile for January 1, 2008 through June 30, 2008 for all business miles driven up from 48.5 cents for 2007;
  • 58.5 cents-per-mile for July 1, 2008 through December 31, 2008 for all business miles driven, an increase of eight cents from the 50.5 cents for the first half of 2008 in recognition of skyrocketing fuel prices;
  • 19 cents-per-mile for January 1, 2008 through June 30, 2008 for deductible medical or moving expenses down slightly from 20 cents for 2007; and
  • 27 cents-per-mile for July 1, 2008 through December 31, 2008 for deductible medical or moving expenses, an increase of eight cents from the 19 cents for the first six months of 2008 to reflect higher fuel prices.

The rates are adjusted for average gas, depreciation and maintenance costs each year and are important for many businesses because of the new four-vehicle limit. Mid-year increases, as have taken place in 2008, are unusual.

FYI – the business mileage rate for 2009 will be 55 cents.

Four or more vehicles

Business owners who use no more than four vehicles for business purposes can use the business standard mileage rate. (The rule before 2004 was that businesses using more than one vehicle at a time could not use the business standard mileage rate. Instead, they had account for the actual expenses for each business vehicle.) Of course, use of the standard mileage rate remains optional. Business vehicles that qualify for standard-rate deduction include cars, vans, pickups, and panel trucks.

Heavy vehicles and large SUVs

For many years, SUV owners enjoyed a special tax break, often referred to as the "SUV loophole." The "luxury car" rules in Code Sec. 280F place strict limits on the maximum amount of depreciation that may be claimed on passenger automobiles, including trucks and vans, during each year of a vehicle's recovery (depreciation) period. Generally, the luxury vehicle limits apply to vehicles primarily used on public streets with an unloaded gross weight of 6,000 pounds or less. However, a light truck or van, including an SUV built on a truck chassis, is not subject to the annual vehicle depreciation limitations if its gross vehicle weight rating (maximum loaded weight) is in excess of 6,000 pounds.

This treatment allowed many taxpayers who purchased an SUV with a gross weight in excess of 6,000 pounds to write off the entire cost in the year of purchase under the Code Sec. 179 expensing deduction.

Here's how it use to work. A small business buys a loaded Cadillac Escalade at year-end 2003 for $60,000. It also buys a new loaded F-250 pickup truck for the business for $40,000. If the business did not make other equipment purchases during the year, it should be able to allocate the full $100,000 combined purchase price to be deducted under the annual $100,000 "section 179 expensing" limitation.

Congress has cracked down on the "SUV loophole." The American Jobs Creation Act of 2004 put the brakes on the cost of any SUV that may be expensed under Code Sec. 179 to $25,000. If the SUV is not built on a truck chassis or if it does not have a gross vehicle weight of more than 6,000 pounds, however, the limit is the even lower luxury vehicle limit. For example, for SUVs weighing 6,000 pounds or less and first placed in service in 2007, that lower limit is $3,060 for 2007, $4,900 for 2008, $2,850 for 2009, and $1,775 (for each subsequent year). For qualifying SUVs placed in service in 2008, the lower limit is that of any other passenger vehicle: $3,160 for 2008, $5,100 for 2009, $3,050 for 2010 and $1,875 for all years thereafter. Additionally, the Economic Stimulus Act of 2008 provides for an $8,000 "bonus" increase in first year depreciation for vehicles for the 2008 tax year only.

Mixing personal with business use

If you use your business vehicle for personal trips (including commuting back and forth from home and your principle business location) you must pro-rate your deduction to exclude the percentage of personal use. The magic number here is 50 percent. As long as you use your vehicle more than 50 percent for business during the year, you can pro-rate your deduction.

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