How would you like to squeeze more time out of your busy week, cut down on record-keeping duties, and reduce piles of paperwork and old receipts? The new 2005 standard mileage rates for business vehicles can help do just that. Starting in 2004, businesses that operate up to four vehicles at the same time can use the new standard deduction rather than keeping track of depreciation, gas, and repairs. The IRS estimates that small businesses will save 8 to 10 million hours a year by opting for the standard deduction.
The standard mileage rates for 2005, recently released by the IRS, are:
These new rates are adjusted for inflation every year, and now become more important than ever for many businesses because of the new four-vehicle limit. According to the IRS, the main reason for the mileage rate increase is the rise in the price of gasoline.
Starting in 2004, business owners who use no more than four vehicles for business purposes can use the standard mileage rate. For 2003, businesses using more than one vehicle at a time can't use the standard rate. Instead, they must account for the actual expenses for each business vehicle. Of course, use of the standard mileage rate remains optional. Business vehicles that qualify for standard-rate deduction include cars, vans, pickups, and panel trucks.
Prior to 2004, businesses with more than one vehicle had to use the "actual expense" method for determining the deduction of each vehicle. There are restrictions, however, even under the more liberal four-vehicle allowance. The most important is that only additional vehicles first used in your business starting after 2003 may use the standard mileage rate. In addition, some record-keeping is still required. Even when claiming the standard mileage rate, you must keep a contemporaneous log of miles driven and the business purpose for each trip. Parking fees and tolls may be deducted as separate items in addition to the standard mileage rate if those receipts are also retained.
Business owners who use vans and light trucks, including SUVs, also get a new break on depreciation. Starting in 2003, the annual inflation-adjusted limits for vehicle depreciation reflect higher dollar limits for vans and light trucks. For 2005, the maximum first-year depreciation that may be taken on a regular passenger vehicle is $2,960. Depreciation for light trucks and vans, however, carry a higher $3,260 cap in recognition of their slightly higher operating costs.
In addition, light trucks and vans that are specially modified for business so that they aren't likely to be used as a personal vehicle are now specifically exempted from the dollar limits altogether. Permanent cargo shelving, painted advertising, or a permanent company logo can take the vehicle out of the "passenger" category. If a light truck or van is "non-passenger," it is subject to neither the regular passenger limits nor any truck-or van-limitation on the amount of depreciation that may be claimed.
Vehicles that weigh more than 6,000 pounds are not considered "passenger automobiles" whether they are sedans, wagon, trucks, vans or SUVs. As a result, they are not restricted by the annual dollar cap on deductions taken on those vehicles. This has created a much-publicized loophole for the owners of 6,000 plus pound SUVs who are not bound by the luxury auto limits. Use of the "section 179 expensing" deduction for SUVs can entitle you to a maximum write off of $25,000!
If you have any questions in regard to how to maximize tax deductions for your business vehicles, and what impact the purchase of a new vehicle may have on those write-offs, please call this office.