Tax Info Blog: Barred from Using Standard Mileage?

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Q: Tax Playa, I receive a 1099-MISC as I am an independent contractor for a company where I transport patients who don't have transportation or can't drive due to injury to doctors/physical therapy appointments . I'm trying to figure out if I can use the standard mileage rate because from what I'm reading you can't use it for cars for hire like a taxi...who must use actual expenses. What I want to know is can I use the standard mileage rate or must I use actual expenses based on my job description?
Mike, Somewhere USA

A: You are correct in researching that the standard mileage rate is not available for use in cars "for hire." This includes taxis, but would also seem to capture your business...

For more information on this, see my post on auto expenses here.

Any car which is used in a "for-hire" business cannot use the standard deduction. However, that isn't necessarily a bad thing. Chances are, you are racking up quite a bit more in actual expenses than you would from the standard mileage rate, anyway.

Let's take an example (I don't know your particulars, so this is for illustrative purposes only). Suppose this is the first year of your business. Your car, which has an adjusted basis of $10,000, is 80% business use. You drive 25 miles per day over 250 days, or 6,250 miles for the year. Gas costs $2.50 per gallon. There is a 1% personal property tax on vehicles in your area. You have a car loan with $8,000 left on it at 6% interest. Every day, you must pay a one-way toll of $1. You have annual maintenance costs of $500. Your insurance is $1000 per year.

What would your deduction be using the standard deduction? The standard deduction rate for 2007 is $0.485 cents per mile, coming out to $3031. To this, you can add your $250 in tolls for a deduction of $3281.

The actual expenses method is more difficult, but much more lucrative. Here are the components from the above example:

$10,000 adjusted basis x 80% business use gives you an $8000 business basis. You choose to use the 179 expense deduction on the vehicle, but encounter the annual cap on depreciation. Nonetheless, your depreciation deduction alone is $2960.
$2.50 per gallon of gas x 6,250 business miles (assuming 30 miles to the gallon) is $521 of gasoline costs.
1% personal property tax x $8000 business basis is $80.
$250 in tolls is a constant from the standard mileage calculation above.
$500 in maintenance costs x 80% business use is $400.
$1000 in insurance costs x 80% business use is $800.
$8000 car loan at 6% interest is approximately $480 in interest, x 80% is $384.

Adding all of those actual expenses together, you get to a total car deduction of about $5500. That's quite a bit larger than the $3281 that the standard mileage rate would give you. It's also a royal pain to compile (especially if you haven't been keeping records all year), which is why I recommend to my clients to take the standard mileage rate and be done with it. You are a special case, since your business is basically conducted in your vehicle.

Comments

I am purchasing a building, using for business, some office and some storage of business vehicles(cleaning/janitorial)
The other part of building is to be rented out to others.

Is there any accelerated depreciation that can be taken in year of purchase?(I know I can't write-off whole purchase price) If i cannot accelerate at all, then written off over 39 years?

Posted by: CB | 2007.10.04 at 10:15 AM

$2.50 per gallon of gas x 6,250 business miles is $15,625 of gasoline costs.

But I suggest that, if you drive for a living, you could save even MORE money by driving a car THAT GETS MORE THAN ONE MILE A GALLON.

Posted by: Tax Guy | 2007.11.23 at 10:48 AM