As it does each year, the IRS recently released the inflation- adjusted 2022 optional standard mileage rates used to calculate the deductible costs of running a vehicle for business, charitable, medical or moving purposes.
Starting on Jan. 1, 2022, the standard mileage rates for using a vehicle (or a van, pickup or panel truck) are:
Business standard mileage rate is based on a yearly research of the fixed and variable expenses of running a vehicle. The rate for medical and moving purposes is based on the variable expenses as established by the same research. The rate for using a vehicle while conducting services for a charitable organization is statutorily set (it can only be altered by Congressional action) and has been 14 cents per mile for over 15 years.
The 2022 rates are based on 2021 fuel costs. Given the potential for the continuation of significantly greater gas costs, it might be appropriate to think about changing to the actual expense approach for 2022, or at least tracking the actual costs, including fuel costs, repair work, maintenance, and so on, so that the option is available for 2022.
Taxpayers always have the alternative of calculating the real costs of using their automobile for business instead of using the standard mileage rates. In addition to the possibility of greater fuel rates, the bonus depreciation and increased depreciation limitations for passenger autos that were part of the 2017 Tax Cuts and Jobs Act might use the actual expense method worthwhile throughout the first year a vehicle is placed in business service.
Nevertheless, the standard mileage rates can not be used if you have used the actual method (using Sec. 179, bonus depreciation and/or MACRS depreciation) in previous years. This rule is used on a vehicle-by-vehicle basis. Additionally, business standard mileage rate can not be used for any automobile used for hire or for more than 4 vehicles at the same time.
When employers reimburse employees for business-related vehicle costs using the standard mileage allowance approach for every substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of employment-connected business travel.
The Tax Cuts and Jobs Act removed employee business expenses as an itemized deduction, effective for 2018 through 2025. For that reason, employees might not take a deduction on their federal returns for those years for unreimbursed employment-related use of their cars, light trucks or vans. Nevertheless, those who are self-employed are qualified to claim expenses for their personal vehicles used in their businesses.
Many of today's SUVs weigh more than 6,000 pounds and are for that reason not subject to the limit rules on luxury auto depreciation; taxpayers with these automobiles can use both the Section 179 cost deduction (up to a maximum of $27,000) and the bonus depreciation (the Section 179 deduction should be used prior to the bonus depreciation) to produce a substantial first-year tax deduction. Nevertheless, the automobile can not surpass a gross unloaded automobile weight of 14,000 pounds.
Caution: Business vehicles are 5-year class life property. If the taxpayer subsequently gets rid of the automobile prior to the end of the 5-year duration, as many do, a part of the Section 179 expense deduction will be regained and need to be included back to income (SE income for self-employed individuals). The future implications of deducting all or a substantial portion of the automobile's expense utilizing Section 179 needs to be thought about.
Think about using bonus depreciation as an option to the Section 179 deduction. Under this provision a taxpayer can choose to claim a deduction of 100% of the expense of a brand-new or pre-owned automobile used for business in the very first year it is placed into business service. Nevertheless, the luxury vehicle rules impose a maximum yearly deduction for depreciation, including the bonus depreciation. For instance, in 2021, the maximum depreciation deduction for an auto for which bonus depreciation was claimed was $18,200. This compares to a maximum of $10,200 if bonus depreciation isn't elected. Obviously, if the vehicle is used only partially for business, then only the business-use portion of the expense is qualified to be deducted.
After 2022, the deductible bonus depreciation portion drops by 20 percentage points a year, until 2027 when, barring an extension by Congress, no bonus depreciation will be permitted.
Whether to claim bonus depreciation, Section 179, regular depreciation or a mix of these approaches for a business automobile, or to use the standard mileage rate instead, can be a complex choice to make.
If you have concerns related to the best approaches of deducting the business use of your vehicle or the documentation needed, please contact MY CPA PRO