Suppose that, during May 2017, you buy a new $50,000 SUV that qualifies for both Section 179 expensing and bonus depreciation. You drive this SUV 15,000 miles during the year, of which 87 percent are business miles.
Let’s further suppose that you can qualify to use the IRS mileage rates (for 2017, 53.5 cents per business mile).
You plan to use the new SUV for three years and then sell it to a third party. Let’s ask and answer three questions:
Would you cheat yourself by using the mileage rates?
If you cheated yourself, how madly did you cheat yourself?
Is there an easy way to know what's best?
Answers to the Questions
Yes, based on the facts above, you would cheat yourself.
How badly would you cheat yourself? Pretty badly. You would have lost $6,215 in after-tax cash.
Is there an easy way to know what’s best? Yes: use the “what’s best” calculator by clicking here. The calculator achieves the following goals:
Figures the Section 179 deduction, depreciation, and ownership costs over the ownership period ($56,246, in this case)
Figures the mileage rate deductions over the ownership period ($20,945, in this case)
Calculates the $9,788 IRS mileage rate depreciation that resides inside the mileage rate
Computes the gain or loss on sale ($10,919 gain with the actual expense method, and $20,663 loss with the IRS mileage rate method)
Applies the appropriate tax rates to the deductions and gains and losses, compares the numbers, and gives a nice presentation of which better and by how in after-tax dollars (all of which boils down to $6,215 in after-tax cash)
Why the Calculator?
First, the calculator takes only minutes to use, whereas computing all those numbers takes a long time. Second, computing and focusing on the numbers that you see above will:
drive you wacky,
seem like way too much work, and
possibly cause you to give up too early and arrive at a false conclusion. (When you examine the calculator, you'll see that it takes lots of calculations to get to the right answer.)
Third, most professional and consumer tax preparation programs calculate the actual expenses versus the IRS mileage rate deduction, but give you misleading numbers. How’s that? Most programs look at one year only. That one-year look gives you only a glimpse and certainly can take you down the rabbit hole.
The Bradford Tax Institute calculator considers your entire ownership period including the deductions during the period and the gain or loss on sale. You simply enter your numbers in the first area, and the software makes the calculations that you see in the orange area below that.
Do you Qualify for the IRS Mileage Rate?
Not everyone can use the IRS mileage rate. You may not use the IRS optional mileage arate on your vehicle if you
have five or more vehicles on the road at the same time;
claimed Section 179 expensing on the vehicle;
claimed any depreciation on the vehicle, other than straight-line depreciation, over the vehicle’s estimated useful life; or
use the vehicle as an employee of the United States Postal Service to deliver mail on a rural route.
Corporation. Your corporation may not use the mileage rate to deduct its corporate-owned vehicles. But the corporation can use the mileage rate to reimburse an employee for the business use of his or her personal vehicle.
Partnership. As a general rule, a partner may not deduct the expenses of a partnership on his own personal income tax return, even if the expenses were incurred by the partner in furtherance of the partnership business. Under this rule, the partnership may not use the IRS mileage rate method on partnership vehicles.
But if, under the partnership agreement, the partner is required to pay certain partnership expenses out of his or her own funds, then the partner is entitled to a Section 162 deduction for the amount of such expenses. And in this case, the partner is claiming the deductions as a self-employed individual and may use the standard mileage rate.
Switching Methods
When you choose the actual expense method, that’s your method for the life of that vehicle.8
This is not true when you start with the mileage method. When you start with the mileage method, you can switch to the actual-expense method using the special rules explained in You Can Switch from the IRS Mileage Rate to the Actual-Expense Method.
Takeaways
Self-employed individuals may use the IRS mileage rates. But corporations and partnerships do not qualify to use the IRS mileage rates on corporate- or partnership-owned vehicles.
If you qualify for the IRS mileage rates, make sure to use our calculator to find which method is best for you. Click here for the calculator.
Why this calculator and not what your tax software shows? Most tax software shows only one year. To make the best decision, you need to consider all the years and the gain or loss on sale.
If you are already using IRS mileage rates, and you find they are hurting you, switch to the actual expense method by following the rules explained in You Can Switch from the IRS Mileage Rate to the Actual-Expense Method.
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