The Ultimate Guide to Deducting Business Travel Expenses Part 3 | GOFAR

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The Ultimate Guide to Deducting Business Travel Expenses: Part 3

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The deductible costs of vehicle operation

There are 2 approved ways to determine the deductible costs of using a car for business purposes. They are the standard mileage rate and the actual expenses.

The Standard Mileage Rate
These applies to business miles, or miles traveled on the road while on a business trip, and are annually adjusted to compensate for inflation. The rates can be found in the IRS website, located here: https://www.irs.gov/tax-professionals/standard-mileage-rates

If you choose to use the standard mileage rate, you can forego the hassle of calculating for fixed and variable business-related costs. Using this method, however, makes it impossible to make an exact account for depreciation, lease payments, maintenance and repairs, tires, gasoline, oil, insurance, license and registration fees, as they have already been taken into consideration.

You can keep records of parking fees and tolls that are part of your business-related expenses as a separate deduction. You may also deduct the interest related to the purchase of the vehicle, as well as state and local personal property taxes in the same manner, to the extent that they are allowable.

If you are using your car for purposes other than business, you must have a clear and documented separation between the business and the non-business portion of your use for the deductions.

If you choose to use the standard mileage rate for a car you personally own, you must use that method in the first year the vehicle is utilized for business purposes. As the vehicle gets older, and you choose the calculate using actual expenses, a per-mile amount is treated as depreciation for the years when you used the standard mileage rate.

If your vehicle is leased and you choose the standard mileage rate for it, then you must use the standard mileage rate for the entire duration of the lease.

The standard mileage rate may not be used to:

  • Compute the deductible expenses of 5 or more vehicles you own or lease and use simultaneously (such as fleet operations like taxis or ride-sharing)
  • Compute the deductible business expenses of your leases, unless you are using the standard mileage rate or a FAVR (fixed and variable rate allowance) for the entirety of the lease
  • Compute for the deductible expenses of a vehicle for which you have:

– claimed depreciation for its estimated useful life using anything other than the straight-line method
– claimed a Section 179 deduction
– claimed the bonus depreciation allowance under Section 168(k) or (n)
– used the ACRS (Accelerated Cost Recovery System) or the MACRS (Modified Accelerated Cost Recovery System)

If you choose to use the standard mileage rate, you will have automatically excluded your owned vehicle from MACRS, as per Section 168(f)(1).

If you use the actual expenses method after using the standard mileage rate, you must use straight-line depreciation for the vehicle’s remaining useful life, with limitations under Section 280F.

You cannot use the standard mileage rate to deduct expenses for a borrowed vehicle or a rental vehicle. You must use the actual expenses method, and as such, the vehicle’s actual owner’s expenses, such as depreciation, repairs and maintenance, or auto insurance cannot be included.

The Actual Expenses method
If you are not using the standard mileage rate, you must calculate your deductions based on the actual expenses of operating the vehicle. These include:

  1. Depreciation
  2. Registration and license fees
  3. Insurance
  4. Gas, oil, repairs, maintenance
  5. Lease payments
  6. Garage rent
  7. Tires
  8. Tolls and parking fees

The expenses for a vehicle used for both personal and business must be divided between the two uses accurately. The expenses are based on the miles driven for each purpose.

Can I switch methods?
Yes, you may do this after the tax year has passed. However, you must choose to use the standard mileage rate in the first year your vehicle is used in business, then you can switch to actual expenses later on.

Keep in mind however that this would mean that you have allowed using only the straight-line depreciation and not MACRS in the future, which means the recovery period for the vehicle will be based on the remaining estimated useful life of the vehicle, which is to be determined by you, as long as the basis is reasonable enough.

One good way to estimate the remaining useful vehicle life would be to divide the amount of miles the vehicle can be expected to last by the number of miles the vehicle is used annually.

You will need to calculate for depreciation in the second and subsequent years after deducting the depreciation component of the standard mileage rate from the adjustments made based on the vehicle.

The rules of listed properties

Photo courtesy of Unsplash Images by Jessica To’oto’o

Passenger vehicles are under listed property. For listed property rules, a passenger vehicle is any vehicle with four wheels, and are to be used primarily on public streets and highways. Its unloaded GVW (gross vehicle weight) must be under 6,000 pounds.

The vehicles below are not listed as passenger vehicles:

  1. An ambulance or a hearse used in a business
  2. A vehicle that provides a paid transport service for people or property
  3. A truck or van that has been qualified as a non-personal use vehicle

If the listed property is not primarily utilized in a trade or business in the year the vehicle has been acquired, then no Section 179 deduction is allowed, and depreciation must be determined via the straight-line method.

In the following years, and the vehicle is not primarily utilized for trade or business purposes, you may have to recapture the depreciation rate that has been previously allowed. You may have to seek the help of a tax professional for this. Also, only the straight-line method can be used to determine depreciation over the remainder of its useful life.

After useful life ends
At the end of the recovery period, you may have an unrecovered asset when depreciation is limited. This basis can be depreciated until you recover the full value of your asset. However, business-use percent limitations and other limitations still apply to the deductions.

Specific rules for business travels in different industries

Rotators
A rotator (oil rig workers, for example) are not treated as being away from his/her tax home when on-duty, and deductions cannot be applied for travel expenses, meals, etc. to and from his/her work site.

Union members
Travels from the union hall and the regular place of work are not deductible, as they are considered non-deductible commuting expenses.

Travelling nurses
The nurse can deduct travel expenses while away from the tax home, if and only if the nurse has a tax home. The usual rules will be applied. A nurse will be able to deduct daily transportation expenses between work locations.

Police officers, firefighters, and EMTs
They are not considered to be transportation workers, thus they cannot use the per diem rates for the transportation industry.

Deductions for meals are not allowed when they are at the firehouse, hospital, or station because they are not away from their tax home. However, when contributing for meals are required as a department policy, only then can the meals be deducted. Voluntary contribution to a meal fund is not deductible, as well as contributions for a union contract, and neither are meals eaten away from the tax home when on-duty.

Volunteers
Expenses that are made out-of-pocket for volunteer work are deductible as a charitable deduction, and are thus subject to charitable deduction limitations. This would include travel, meals, and mileage.

Military reservists
They are allowed to deduct travel expenses as employees, and as such, they are subject to the 2% AGI requirement, only when it is necessary to stay away from home in relation to reserve service.

Form 2106 must be attached to the tax return.

Performing artists
A performing artist must have earned at least $200 from each of at least 2 employers as a performing artist before qualifying for deductibles. The allowable expenses must be more than 10% of the artist’s gross income, and their AGI must be $16,000 or less. If the artist has a spouse, they must jointly file and deduct these expenses to meet the AGI limitation.

Form 2106 must be attached to the tax return.

Government officials on fee-basis
Their expenses are deductible to determine adjusted gross income. The official must however be employed by a state or political subdivision of a state, partly or wholly, on a fee basis.

Form 2106 must be attached to the tax return.

State legislators
A state legislator may choose to treat his residence within the legislative district that he represents as his tax home for that year, for the purpose of calculating for the travel expenses away from home. A legislator who makes the election is considered to be away from home during each “legislative day.”

He/she cannot be considered elected if the legislator’s residence is less than 50 miles from the state capitol building.

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