Reconsider mileage deduction
By Sandra Block
If you ever doubted America's love affair with cars, check out the hit MTV makeover series "Pimp My Ride." Every week, rusty beaters are transformed into profilin' chariots with new paint jobs, plush interiors and special features, such as a back-seat aquarium.
But whether your ride is a tricked-out Mustang with chrome wheels or a 1994 Ford Escort, you still have to fill your tank with gas. And while prices have moderated in the past couple of weeks, the average price for a gallon of gasoline is still 30 percent higher than it was a year ago. That's a problem for anyone who drives, but it's particularly troublesome for self-employed people who use their cars for business.
Fortunately, mileage is a deductible business expense, so you can recoup some costs when you file your tax returns. To get the full benefit of the deduction, it's more important than ever to keep track of your costs. And this year, you may also want to reconsider how you deduct your mileage at tax time.
The Internal Revenue Service provides two ways to deduct the business use of an automobile:
Actual expenses. You claim all the expenses associated with operating a car for business, such as gas, maintenance, repairs and oil. If you use your car for both business and nonbusiness purposes, you can only deduct a percentage, based on your business-related miles. For example, if you drive 10,000 miles this year and 5,000 are business-related, deduct 50 percent of your expenses.
The standard mileage allowance. For 2004, the mileage allowance is 37.5 cents a mile. If you drive 1,000 miles for business this year, you'll be allowed to deduct $375 on your 2004 tax returns.
If this is the first year you're using a car for business, you should use the standard deduction. That gives you the option of switching methods later on, says Mark Luscombe, analyst for tax information provider CCH. If you use actual expenses the first year, you must continue to use that method for as long as you use the car.
Many drivers use the standard mileage allowance because it's easier to compute. But this year, switching to the actual cost method may deliver a bigger deduction. The IRS announced the 2004 standard allowance last October, when gas was selling for about $1.50 a gallon. This year's higher prices are expected to be factored into the 2005 standard mileage rate, but that won't help drivers who paid more at the pump in 2004.
Using the actual expense method allows you to factor in higher fuel costs. But even at today's prices, some drivers may fare better with the standard allowance, says Jackie Perlman, tax analyst for H&R Block.
"If you have a car that gets great mileage and you don't make that many trips, chances are standard mileage is still your best bet," Perlman says. "If you have lower mileage, make lots of trips and you're spending a fortune on gas, then chances are your actual expenses are a better bet."
You don't need to decide which method to use until you file your 2004 taxes. But in the meantime, it's important to keep a detailed log of your business miles, along with receipts for repairs and maintenance.
The gas price increase also has created problems for some workers who use their own cars for business and are reimbursed by their employers for the costs. If your employer reimburses you for less than the IRS standard allowance, you may be able to deduct the difference. But taking the deduction isn't easy.
Unreimbursed travel expenses are classified as a miscellaneous expense by the IRS. To qualify for a deduction, your combined miscellaneous business deductions must exceed 2 percent of your adjusted gross income.
If you can get over that hurdle, use IRS Form 2106 to report your unreimbursed expenses, says Donna LeValley, contributing editor for J.K. Lasser's "Your Income Tax." Make sure you keep a mileage log and receipts for all your costs.
And don't overlook other ways to recoup some fuel costs:
Charity miles. If you use your car for volunteer work, you can deduct your mileage on your tax return, using the IRS' standard charitable allowance. For 2004, the standard rate for charitable mileage is 14 cents per mile.
Moving expenses. If you relocate and qualify for a moving expense deduction, you can deduct 14 cents a mile for the cost of driving to the new location.
Medical costs. If you're eligible to deduct unreimbursed medical expenses, you can deduct the cost of driving to and from your doctor's office, hospital or clinic. The standard rate for 2004 is 14 cents a mile. However, unreimbursed medical expenses must exceed 7.5 percent of your adjusted gross income before you can deduct them.