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Note: For 2018 to 2025, the deduction for miscellaneous itemized deductions subject to the 2-percent floor, including unreimbursed employee expenses, has been suspended, and cannot be claimed on Schedule A of IRS Form 1040. If you are an employee, you will not be able to deduct your unreimbursed auto expenses.

If you use your car, truck, or other vehicle for business purposes, you can generally deduct the expenses associated with this use on your federal income tax return. This is true whether you're self-employed or you use a vehicle provided by your employer. To calculate the deduction, you may have a choice between two methods: (1) the standard mileage rate, or (2) actual expenses.

Tip: If you have a choice, you should calculate the deduction using both methods to determine which results in the larger amount.

For more information about car and truck expenses in general, see IRS Publication 463.

The Standard Mileage Rate

Each year the IRS designates a standard mileage rate, which allows a certain deduction for each mile a vehicle is used for business purposes. For tax year 2020, the standard mileage rate is 57.5 cents per business mile (for tax year 2019, the standard mileage rate is 58 cents per business mile).

Tip: Keep a record of your business mileage to support your deduction. See IRS Publication 583 for more information about record keeping.

Requirements for Using the Standard Mileage Rate

To use the standard mileage deduction, (1) you must own or lease the vehicle (i.e. you cannot be an employee using an employer-provided vehicle) and (2) you must have used the standard mileage deduction in the first year the vehicle was placed in service. After the first year, you can use either the standard mileage rate or actual expenses. However, if you lease the vehicle, you must continue to use the standard mileage rate for the term of the lease.

You cannot use the standard mileage rate if any of the following applies:

  • You operate five or more vehicles (i.e., a fleet) at the same time
  • You claimed actual expenses for a vehicle you leased
  • You claimed depreciation on the vehicle using a calculation method other than straight line
  • You claimed a Section 179 deduction on the vehicle (discussed further below)

Tip: Starting in 2011, the standard mileage rate can be used for vehicles used for hire, such as taxicabs.

Deducting Other Vehicle Expenses

If you use the standard mileage rate, you cannot deduct actual expenses. You cannot deduct depreciation, lease payments, gas and oil, maintenance and repairs, insurance, or registration fees. However, you may be able to deduct the following expenses:

  • Vehicle loan interest, reduced by any percentage of personal use
  • Personal property tax, regardless of personal use (available to taxpayers who itemize only)
  • Parking fees and tolls

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Actual Expenses

If you don't qualify or simply choose not to use the standard mileage rate, you can deduct the actual costs of using your vehicle including depreciation, parking fees and tolls, tires, repairs, gas and oil, rental fees, lease fees, licensing fees, and garage rental fees. If you use your vehicle for both personal and business use, only that portion used for business is deductible.

Tip: Keep careful records of all expenses. See IRS Publication 583 for more information about record keeping.

Depreciation Deduction in General

Depreciation is an allowance for wear and tear, deterioration, or obsolescence, which decreases a motor vehicle's value. There are two possible depreciation deductions for motor vehicles

  • Annual depreciation
  • Section 179 deduction (available in the first year of service only)

Each deduction has its own restrictions and limitations. And, for certain vehicles, there is also a cap on the total standard depreciation that can be taken in a given year. See IRS Publication 946 for more information about depreciation.

Annual Depreciation Deduction

Because motor vehicles have useful lives extending substantially beyond the first year they are placed in service, you cannot deduct the entire purchase price, including sales tax and improvements, in the year of purchase. However, you can deduct theses costs by taking annual depreciation deductions over a number of years as long as you use your vehicle for business more than 50 percent of the time.

Section 179 Deduction

Alternatively, you may be able to elect to take a Section 179 deduction for the vehicle, which allows you to deduct a limited amount in the year the vehicle is put into service.

Total Standard Depreciation Cap

Annual depreciation and Section 179 deductions are limited to certain maximums according to the type of vehicle. The maximum total depreciation deductions that can normally be claimed for vehicles placed in service during 2019 are as follows:

  • Autos: $10,100 ($10,000 for 2018) for the first year the car is in service, $16,100 ($16,000 for 2018) for the second year, $9,700 ($9,600 for 2018) for the third year, and $5,760 ($5,760 for 2018) for each succeeding year
  • Trucks and vans: Dollar limits are the same as for autos in 2018 and 2019.

Tip: The Small Business Jobs Act of 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the American Taxpayer Relief Act of 2012, the Taxpayer Increase Prevention Act of 2014, and the Protecting Americans from Tax Hikes Act of 2015 extended the first-year 50-percent additional depreciation to property acquired in 2010 to 2017. The Tax Cuts and Jobs Act provides for 100-percent additional depreciation for property placed in service after September 27, 2017 and before 2023 (reduced by 20 percent in each year from 2023 to 2026), increasing the first-year auto limit by $8,000 in 2019. As a result, the first-year depreciation limit for 2019 is $18,100 for autos and trucks and vans. For autos, trucks, and vans acquired before September 28, 2017 and placed in service during 2019, the first-year auto limit is increased by $4,800 to $14,900. Note that special 100 percent first-year bonus depreciation rules applied to qualifying property placed in service after September 8, 2010, and before January 1, 2012. Special rules apply to the calculation of allowable depreciation in subsequent years — consult IRS Publication 463.

Caution: These maximums are reduced if the vehicle is used less than 100 percent for business, or less than a full year.

The types of vehicles subject to the limitations described above are:

  • Passenger automobiles weighing 6,000 pounds or less
  • Trucks, vans (including minivans), and SUVs weighing 6,000 pounds or less unless the vehicle is exempt

Vehicles that are exempt from the limitations described above are:

  • Trucks, vans (including minivans), and SUVs weighing more than 6,000 pounds
  • Trucks, vans (including minivans), and SUVs weighing 6,000 pounds or less that have been modified to meet the description of a "qualified non-personal use vehicle."

Caution: Certain exempt vehicles placed into service on or after October 23, 2004 are subject to a $25,000 Section 179 deduction limit. See IRS Publication 463 for more information about the total standard depreciation cap.

Employer Reimbursements

You cannot deduct the cost of using your vehicle for business purposes if your employer reimburses you for these expenses. You do not have to report the reimbursement allowance or the expenses on your tax return, and your employer will not report the reimbursement as income on your W-2 form as long as you provide a record to your employer showing the time, place, and business purpose of the vehicle expense being reimbursed.

Tip: If you're reimbursed at a rate below the standard mileage rate, the difference may be deducted on Schedule A. If you're reimbursed at a rate above the standard mileage rate, the difference is treated as taxable wages to you.

Note: For 2018 to 2025, the deduction for miscellaneous itemized deductions subject to the 2-percent floor, including unreimbursed employee expenses, has been suspended, and cannot be claimed on Schedule A. If you are an employee, you will not be able to deduct your unreimbursed auto expenses.

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

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The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.


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