Discussion:Interesting discussion standard mileage or actual expenses

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Tax Questions --> Interesting discussion standard mileage or actual expenses


Dusty (talk|edits) said:

4 April 2007
Ok, I was just in an interesting discussion and I can prove my stance but would like to hear what others have to say as it appears there is some mis-understanding on this issue.

When placing a new vehicle into use in a business. The first year you choose to use the standard mileage rate and not actual expenses.

In future years can you switch to actual expenses?

Dusty

JR1 (talk|edits) said:

April 4, 2007
I've always thought no, but ProSeries allows you to.

Death&Taxes (talk|edits) said:

4 April 2007
You can go from mileage to actual, but not back again is how I was taught.

Pegoo (talk|edits) said:

4 April 2007
I was taught you take either or in the sense of an AUDIT.

Wwtaxes (talk|edits) said:

4 April 2007
If I recall from training, you can go from mileage to actual, but if you choose actual, you can't go to mileage.

I've never made the switch. I'd be confused as to how you do depreciation if you switched back and forth. Would you just take other expenses and not depreciation?

Death&Taxes (talk|edits) said:

4 April 2007
Publication 463 Read Page 15-16. You can choose mileage the first year the car is placed in service. Read the paragraph.

Wwtaxes (talk|edits) said:

4 April 2007
Well that answers it. But what a pain! You'd think any tax benefit would be offset by bookkeeping costs!

Deback (talk|edits) said:

April 4, 2007
In order to switch to actual for any year after the first year, you have to choose the standard mileage rate for the first year. This rule is in Publication 463. I remember this answer from another discussion last week, when I looked it up in the Pub.

Dusty (talk|edits) said:

4 April 2007
D&T has it correct with the Publication I was going to link to. I was surprised how many when we had our discussion did not know the corrct answer to this.

Dusty

PVVCPA (talk|edits) said:

April 4, 2007
Perhaps this was implied, but I did not read it in any of the above post. If you chose SM in the first year and then switch to AE in a subsequent year, you must use MACRS SL. If you follow this requirement, you can switch back to SM in a later year.

Riley2 (talk|edits) said:

5 April 2007
You can switch from standard to actual without much of a problem. However, you may switch from actual to standard only in cases where you used the standard mileage rate or other non-MACRS method in the first year that the vehicle was placed in service for business purposes. This is due to the fact that the standard mileage rate election is an election out of MACRS, and the election out of MACRS must be made on a timely filed return for the year that the vehicle was first placed in service for business purposes.

In years subsequent to a year in which the election out of MACRS is made, the taxpayer is limited to non-MACRS methods such as straight-line over the useful life, or the standard mileage rate.

PVVCPA (talk|edits) said:

April 5, 2007
I believe MACRS SL is an appropriate method to use and still switch back to standard. When Pub 463 speaks of non-MACRS, I believe it was implying MACRS 200% or any other accelerated MACRS method.

TexCPA (talk|edits) said:

5 April 2007
The business standard mileage rate may not be used to compute the

deductible expenses of an automobile for which the taxpayer has (a) claimed depreciation using a method other than straight-line for its estimated useful life, (b)claimed a § 179 deduction, (c) claimed the special depreciation allowance under § 168(k), or (d) used the Accelerated Cost Recovery System (ACRS) under former § 168 or the Modified Accelerated Cost Recovery System (MACRS) under current§ 168. By using the business standard mileage rate, the taxpayer has elected toexclude the automobile (if owned) from MACRS pursuant to § 168(f)(1). If, after using the business standard mileage rate, the taxpayer uses actual costs, the taxpayer must use straight-line depreciation for the automobile's remaining estimated useful life (subject to the applicable depreciation deduction limitations under § 280F).

http://www.irs.gov/pub/irs-drop/rp-06-49.pdf

PVVCPA (talk|edits) said:

April 5, 2007
So does MACRS SL qualify as a straight line method over the automobile's remaining useful life?

Lacerte has a depreciation method Code 56, which is MACRS SL with 280F limitations. There are no other SL depreciation methods provided by Lacerte that will apply the 280F limitations. Therefore, this is the one that I use when I set up an automobile that may switch back and forth between standard mileage and actual expenses. I set it up as standard mileage for the first year, and then I elect to apply the Straight Line method instead of MACRS 200%.

Is this not right?

Bengoshi (talk|edits) said:

5 April 2007
I was under the impression that for tangible depreciable personal prop (like an auto), Sec. 168 automatically applies a MACRS method which is why you couldn't go from actual in the 1st year to Standard later... but what's the difference between MACRS S/L vs. non-MACRS S/L?

Riley2 (talk|edits) said:

5 April 2007
Using MACRS straight-line in the first year of service would disqualify the vehicle from using the standard mileage rate. See Sec. 168(f)(1)(B). In addition, using the standard mileage rate in the first year of service is a permanent election out of MACRS; consequently, the taxpayer would be limited to using the SL method over the estimated useful life.

Bengoshi (talk|edits) said:

5 April 2007
Thank you Riley. So the only way to elect out of MACRS for an auto is by using the standard mileage method in the 1st year?

Riley2 (talk|edits) said:

5 April 2007
Yes, unless the automobile was first placed in service before 1987, in which case the vehicle would be excluded from MACRS any way.

Bengoshi (talk|edits) said:

5 April 2007
Now I understand. Thanks Riley! (PVV, that answers our question)

PVVCPA (talk|edits) said:

April 5, 2007
Yes, that does answer it. Thank you, Riley & Bengoshi.


But here is another question which looks an awful lot like a prior question:

Would a depreciation method that looks remarkably similar to the MACRS SL method qualify as a "SL method over the vehicle's estimated useful life"?

Wamark (talk|edits) said:

5 April 2007
With all of the variables mentioned above, in addition to depreciation variables that change every year (bonus, 179, Section 280F limits), it is so hard to predict what method provides the best deal over the period of time the business owner uses the car. Then look out if use falls below 50% and you have to recapture section 179.

I think the more interesting question is how do you advise a client who is placing a car in to business use for the first time.

Generally, in what circumstances do you advise standard mileage and in what circumstance do you advise actual expense? Why?

Skq9545 (talk|edits) said:

5 April 2007
By understanding from the CCH 1040 Express Answers is you may change from mileage to actual but not from actual to mileage.

Riley2 (talk|edits) said:

5 April 2007
This is not quite right. You may switch from actual to mileage as long as you elected to use mileage in the first year.

Death&Taxes (talk|edits) said:

5 April 2007
Mark: low mileage, high insurance [city people] lend themselves to actual.

Natalie (talk|edits) said:

April 5, 2007
"Generally, in what circumstances do you advise standard mileage and in what circumstance do you advise actual expense? Why?"

It depends. If the car is owned by the owner/employee and the company is an S-corp, I recommend using the standard mileage rate and reimbursing the owner/employee throughout the life of the car. This avoids the rules regarding unreimbursed business expenses and the limitation on itemized deductions.

If the individual is a sole proprietor, I would generally recommend standard the first year to preserve the option of using actual or mileage in the future.

If the auto is owned by the company (corporation, partnership) and personal use is limited, I would recommend actual expenses right from the beginning.

About 10 years ago, I kept track of my actual car expenses over a period of about seven years, and they came quite close to the mileage rate.

Natalie (talk|edits) said:

April 5, 2007
Good point D&T. That's a consideration as well.

To join in on this discussion, you must first log in.
Personal tools