The IRS today released the standard mileage rates for 2007. It is important to review what the rules are for business use of a vehicle. Next, the three kinds of standard mileage rates must be considered. Finally, the depreciation recapture amounts must be explained and calculated.
Rules for Business Use of an Automobile
I have already done an extensive post on this, so please read it before proceeding if you are not familiar with the rules.
As a reminder, the standard mileage rate must be used the first year the car is placed in service as a business asset, or not at all. If actual expenses are used after taking the standard mileage rate, straight-line depreciation over 5 years (subject to the annual limits) must be used.
All actual expenses are covered by the standard mileage rate except parking, tolls, interest (to a business only on business use percentage), and personal property tax (personal use is deductible on Schedule A). These may be taken above and beyond the standard mileage rate.
2007 Standard Mileage Rates
There are three standard mileage rates depending on the type of mile the car was used for. Personal use of a vehicle has a mileage rate of 0 cents.
- Business (as an employee or business owner): $0.485 cents per mile
- Charitable (gratuitous services to a charitable organization): $0.14 cents per mile
- Medical and Moving (use must be otherwise deductible): $0.20 cents per mile
Depreciation Recapture for Business-Use Vehicles
Since the standard mileage rate is considered to account for the actual expenses of the vehicle, this includes business depreciation on the vehicle. If a car was actually depreciated and the disposition price exceeded the adjusted basis, there would be a depreciation recapture at ordinary income tax rates. The same is true with business mileage.
The amount claimed for depreciation is assumed to be $0.16 for 2003 and 2004, $0.17 for 2005 and 2006, and $0.19 for 2007.
Example
Suppose you purchase a vehicle for $20,000. It is exclusively business-use. Over the course of the next 3 years, you drive it 100,000 miles for business, racking up about $45,000 in business mileage deducted. If those three years were 2005-2007, $17,667 of depreciation was deemed to be claimed.
You then sell the vehicle for $5000. You have an adjusted basis in the car of ($20,000-$17,667, or $2333). This gives you a gain of $2667, which you must pay ordinary income tax on as a depreciation recapture.
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