The IRS has announced that the optional standard mileage rate for business use of an automobile (including vans, pickup trucks and panel trucks) will decrease effective January 1, 2010 to 50 cents per mile, down from 55 cents per mile in 2009. (The standard rate for using an automobile for medical reasons or for calculating deductible moving expenses will be 16.5 cents per mile while, the rate used when using an automobile to provide services to a charitable organization remains unchanged at 14 cents per mile).  The IRS also indicates that if taxpayers use no more than 4 vehicles for business purposes, they may use the optional standard mileage rate for all of them.

The optional standard rate may be used by taxpayers to decrease the record keeping burden associated with tracking actual automobile expenses. You would compute the permitted deduction by multiplying the business miles driven during the year by the standard mileage rate. Parking and tolls, at least the business portion, are in addition to the standard mileage rate.

The deduction is allowed only for that part of the expenses that is attributable to business use (sorry, commuting is considered personal use). Yep, an employee using it for business so qualifies (even if it’s a certain pudgy accountant’s automatic Porsche Boxter). Of course, one can always substantiate such auto costs by keeping exact records of expenses such as gas, repairs, tires, licenses, insurance, oil, car lease payments, auto depreciation, oil and other such maintenance costs allocable to the business usage by the employee or self-employed person. 

Incidentally, in the past the Tax Court sanctioned the use of the standard mileage rate where a taxpayer made trips by car to the IRS and back in connection with an office audit of the taxpayer's tax return and also used the vehicle to go to a library to do research in connection with the audit. In this situation, the cost would have to be deducted as a miscellaneous itemized deduction, where it would only be deductible if those deductions exceeded 2% of adjusted gross income.

This business standard mileage rate can be used for leased or owned autos but where the particular owned car uses the standard mileage rate, depreciation is assumed to be 21 cents per mile for those years in which the business standard mileage rate was, in fact, used. Abo and Company professionals, as tax preparers, need to know this information since the depreciation so described reduces the basis of the car in determining gain or loss when it is disposed of later on.

An employer’s reimbursements to employees for properly documented business expenses are not subject to payroll taxes, nor must such reimbursements be reported on the employee’s tax return. This tax-free treatment applies in the case of a mileage allowance, but only if the reimbursement rate is no more than the IRS-approved standard mileage rate.  Note that reimbursements made after January 1, 2010 for mileage incurred after that date, 50¢ per mile is the maximum rate at which employers may reimburse employees for the use of their vehicles in your business activities without incurring a payroll tax or withholding liability related to the reimbursement. If employers choose to reimburse employees at a higher rate (for example, by continuing to use the 55¢ per mile from 2009), the excess over 50¢ per mile is treated as additional income to the employee, subject to income and payroll taxes. Yep again - often a bookkeeping nightmare.

One question we at Abo and Company get asked a lot, as we’re sure is the case with many of our tax-preparer colleagues, is about interest incurred on a car loan.  You should note that interest paid by an employee on their auto loan is considered nondeductible personal interest.  A self-employed taxpayer can, however, deduct the business portion of such interest paid as a business expense but the remaining nonbusiness portion is considered nondeductible personal interest.