IRS Increases Standard Mileage Rate For 2007

Under the federal income-tax law, employees or self-employed individuals may claim a tax deduction for business use of a personal vehicle. The law allows a taxpayer to deduct the actual expenses for fuel and oil, depreciation, lease payments, maintenance and repairs, tires, insurance, etc., incurred in the business use of the vehicle. Or, the taxpayer may use an optional standard mileage rate to compute the deductible amount.

The IRS recently announced that it is increasing the optional standard mileage rate to 48.5 cents for business travel in 2007. (The previous rate was 44.5 cents per mile.) The rate applies to use of owned or leased vehicles, including vans and pickup trucks.

Note that, even if you claim the optional standard mileage rate, you may still separately claim parking fees and tolls incurred while driving for business.

Advantages and Disadvantages

There are some advantages to using the optional standard mileage rate:

• There is no need to keep records of actual expenses or keep receipts for those expenses. However, the taxpayer does need to keep a record of the time, place, business purpose, and the number of business miles traveled.
• If the optional standard mileage rate is used, the limit on depreciation for luxury vehicles or special rules that apply if qualified business use does not exceed 50% of total use are avoided.

Whether or not claiming the optional rate will result in a higher deduction over the actual expense method depends mainly on the vehicle used. For example, utilizing the optional rate for high-mileage business use of a fuel-efficient car generally results in a higher deduction. Keeping records of actual expenses and figuring the deduction using both methods will help you claim the higher deduction, but that benefit may be offset by the time and effort involved in maintaining records and performing the calculations.

If You Are an Employee

If you use your personal vehicle for use in your employer’s business, and you are not reimbursed for the expense, you may generally deduct your business use of the vehicle as an employee business expense which, together with other miscellaneous itemized deductions, is deductible only to the extent they exceed 2% of your adjusted gross income. Again, you may use either the actual expense or optional standard mileage rate method.

In many cases, though, employers reimburse their employees for business use of personal vehicles. If your employer reimburses at a rate that does not exceed the optional standard mileage rate, the reimbursement is treated as a tax-free accountable plan reimbursement as long as you document the time, place, business purpose, and trip mileage.

Other Standard Mileage Rates

The tax law also provides optional standard mileage rates for other purposes. For 2007, the rate for vehicle use to obtain medical care is 20 cents per mile (up from 18 cents). The same rate applies to use of a vehicle in connection with a residential move that qualifies for the moving expense deduction. The rate for driving for charitable purposes remains at 14 cents a mile.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.