S ection 6 CAR AND TRUCK EXPENSES Mastering Tax Preparation Car and for Sole Truck Proprietors Expenses Introduction If a proprietor owns or leases a vehicle that is used for business purposes, the proprietorship may deduct business car and truck expenses on line 10 of Schedule C. The deduction may be calculated using one of two methods authorized by the IRS: 1. the standard mileage rate method; or 2. the actual expense method. This section discusses business use of a vehicle, explains the calculation of deductible vehicle expenses, and introduces taxpayers to the recordkeeping requirements for business vehicle deductions. Business Use of a Vehicle Local transportation commuting from hom e to w ork The cost of commuting from home to a proprietor s regular work location is a nondeductible personal expense. Thus, when a proprietor uses his vehicle to commute to and from his regular work location, he has no business mileage. The fact that a proprietor makes business phone calls, engages in business conversations with passengers in the vehicle, or uses the vehicle for business advertising while driving to and from work is irrelevant. Local transportation other In general, when a proprietor drives his vehicle in connection with the proprietorship s business, other than commuting to and from the regular workplace, he is using the vehicle for business purposes. 103
Mastering Tax Preparation for Sole Proprietors For example, when a proprietor drives between business locations, he is using his car for business transportation. Thus, the mileage between his regular workplace and a client s office is business mileage. Similarly, the mileage between two customer locations is business mileage. If a proprietor has at least one regular work location, business use also includes driving from the proprietor s home to a temporary work location in the same business in the same metropolitan area in which the proprietor normally works. Employment at a work location is generally considered temporary if it is expected to last (and does, in fact, last) for one year or less. 1 EXAMPLE 1: Shari maintains an office in a downtown commercial suite. The cost of Shari s transportation between her home and her office is a nondeductible personal commuting expense. However, Shari can deduct the cost of round-trip transportation between her office and a client s or customer s place of business. She may also deduct the cost of transportation between client and customer locations. EXAMPLE 2: Steve is a self-employed consultant who maintains an office several miles from his home. If Steve spends a few days working at a client s office located in the same metropolitan area in which he regularly works, he may deduct the cost of round-trip transportation between his home and the client s office. EXAMPLE 3: Kelly is a self-employed attorney. Kelly attends a 3-day continuing legal education seminar in the same city in which she works. The seminar is considered a temporary business location. Therefore, Kelly may deduct the cost of round-trip transportation between her home and the seminar location. EXAMPLE 4: Fred is a self-employed musician who lives and works in the Los Angeles metropolitan area. He has no regular workplace. Because Fred has no regular workplace, he cannot deduct the cost of commuting to and from a temporary work location in the Los Angeles metropolitan area. Therefore, the cost of transportation from Fred s home to his first work location of the day is a nondeductible personal expense. Likewise, the cost of transportation from Fred s last work location of the day back to his home is a nondeductible personal expense. However, if Fred travels to more than one business location during the day, he may deduct the cost of transportation between business locations. 104
Car and Truck Expenses Transportation from a Home Office If a proprietor regularly works in a home office that qualifies as the proprietor s principal place of business, the proprietor may deduct the cost of transportation from his or her home office to other business locations within the same metropolitan area. EXAMPLE 5: Carl is a self-employed bookkeeper. Carl works out of his home office, which qualifies as his principal place of business. Carl may deduct the cost of transportation between his home and other business locations, such as client offices, within the same metropolitan area. A home office must meet several requirements to qualify as the principal place of business. These requirements are discussed in Section 13 of this course, Expenses for Business Use of Your Home. Out-of-town T ransportation If a proprietor uses his or her vehicle for out-of-town business travel, the cost of the round-trip transportation is generally deductible. However, if any of the out-of-town mileage is for nonbusiness purposes, the cost of the nonbusiness transportation is a nondeductible personal expense. EXAMPLE 6: Rena, a self-employed bookkeeper in Boston, attended a 1-week accounting and taxation seminar in Providence. Rena drove her own vehicle to and from the seminar. While on the business trip, she drove an extra 100 miles to visit a relative. Rena s mileage, exclusive of the 100 personal miles, is business mileage. If a proprietor accepts a temporary out-of-town work assignment, the cost of round-trip transportation between the proprietor s home and temporary out-of-town business location is deductible. In general, an out-of-town assignment does not qualify as temporary if it lasts for more than 1 year. EXAMPLE 7: Dave, a self-employed contractor, lives and works in Sacramento. He accepts a 6-month job in Las Vegas. Dave drove 1,500 miles traveling between his home in Sacramento and his temporary assignment in Las Vegas. The cost of the round-trip transportation is deductible. 105
Mastering Tax Preparation for Sole Proprietors Tolls and Parking In general, tolls paid while driving business miles are deductible. Tolls paid while driving personal miles, including commuting miles, are nondeductible. The cost of parking at a proprietor s regular business location is a nondeductible personal expense. The cost of parking at other business locations, such as client and customer offices, is deductible. EXAMPLE 8: Carla, a self-employed consultant, pays $100/month to rent a parking space at a garage adjacent to her office. The cost of the monthly parking is a nondeductible personal expense. However, if Carla incurs additional parking charges when she travels to other business locations, she may deduct the cost of the additional charges. Calculation of the Car and Truck Expense Deduction As previously mentioned, a proprietor may calculate the car and truck expense deduction using either the standard mileage rate method or the actual expense method. The standard mileage rate method is easier and requires less recordkeeping than the actual expense method. However, the actual expense method may result in a larger deduction. Therefore, many proprietors calculate the deduction both ways and select the method that results in the larger deduction. Standard Mileage Rate Method Under the standard mileage rate method, business vehicle expense is calculated by multiplying the total business miles driven during the tax year by the standard business mileage rate in effect for the tax year. The standard business mileage rate is published annually by the IRS. For 2002, the rate is $0.365/mile. In addition, a proprietor may deduct the cost of business parking and tolls. EXAMPLE 9: Shauna, a self-employed individual, uses the standard mileage rate method to calculate her business auto expense deduction. During 2002, she drove her car 5,500 business miles and paid $150 in business parking and tolls. 106
Car and Truck Expenses Shauna s 2002 car and truck expense deduction is calculated as follows: 1. Multiply the business miles driven by the standard business mileage rate in effect for the year: 5,500 business miles x $0.365/mile = $2,008 2. Add the $150 of business parking and tolls to the amount calculated in Step 1. $150 + $2,008 = $2,158 Shauna s 2002 car and truck expense deduction is $2,158. Requirements for the standard mileage rate method In general, the standard mileage rate method may be used to determine the deductible costs of operating a car, van, pickup truck, or panel truck that is owned or leased by the proprietor and driven for business purposes. You may use the standard mileage rate for 2002 if: 1. you lease the vehicle and are using the standard mileage rate for the entire lease period, or 2. you own the vehicle and use(d) the standard mileage rate for the first year you placed the vehicle in service. If you lease a car and the lease commenced before 1998, the entire lease period means the portion of the lease period, including renewals, beginning on January 1, 1998. For additional information, see Revenue Procedure 97-58, IRB 1997-52 (December 29, 1997). Other deductible vehicle expenses under the standard mileage rate The standard mileage rate includes an allowance for vehicle operating costs, lease payments (if the vehicle is leased), and depreciation expense (if the vehicle is owned). If the standard mileage rate method is used, no additional deduction is permitted for operating expenses, such as gas, repairs, 107
Mastering Tax Preparation for Sole Proprietors insurance, and license and registration fees, or for lease payments or depreciation. However, the standard mileage rate does not include an allowance for personal property taxes on vehicles, or for interest expense on vehicle loans. Therefore, a proprietor may deduct the business percentage of these expenses in addition to the standard mileage rate allowance. The deduction for personal property tax is claimed on line 23, Taxes and Licenses, and the deduction for interest expense is claimed on line 16(b), Interest, other. The deductions for business taxes and interest are discussed in Sections 10 and 11 of this course, respectively. EXAMPLE 10: The facts are the same as Example 9. In addition, assume that Shauna drove her car a total of 15,000 miles during 2002 and paid the following expenses: 1. $200 of state personal property tax imposed on her car; and 2. $1,400 of interest expense on a loan to finance the purchase of her car. Shauna may deduct the business percentage of the personal property tax and the interest expense on her Schedule C. The business percentage is calculated by dividing the business miles driven, 5,500, by the total miles driven, 15,000. Thus, the business percentage is 36.67% (5,500/15,000). The deduction for the business percentage of the personal property taxes equals $73.34 ($200 x 0.3667). The $73.34 is deducted on line 23 as part of the business taxes and licenses expense. The deduction for the business percentage of the interest is $513.38 ($1,400 x 0.3667). The $513.38 is deducted on line 16(b) as part of the interest expense. Thus, Shauna claims the following deductions on her Schedule C: Car and truck expenses line 10 $2,048 (from Example 9) Interest, other line 16(b) $ 513 Taxes and licenses line 23 $ 73 108
Car and Truck Expenses Recordkeeping In order to claim a car and truck expense deduction, a proprietor must maintain records documenting the following: the tax basis of the vehicle; the date the vehicle was placed in service for business purposes; the total miles driven during the tax year; and the total business miles driven during the tax year. In addition, the following information must be provided for each business use of the vehicle during the tax year: the date; the total miles driven; and the business purpose of the trip. The IRS recommends documenting this information in a mileage log, business diary, trip report, or some other written record. The record should also include the dates and amounts of business parking and tolls. Under the standard mileage rate method, the proprietor is not required to document the amount of vehicle operating expenses, such as gas, repairs, and insurance. Documentation is required for business parking and tolls. Actual Expense Method Under the actual expense method, a proprietor deducts the actual costs of operating a vehicle for business purposes. The deduction is calculated by multiplying the business use percentage of the vehicle for the current tax year by the actual operating expenses. These expenses include: gas and oil; repairs and maintenance, including the cost of tires; 109
Mastering Tax Preparation for Sole Proprietors insurance; and registration fees. 2 In addition, business parking and tolls are fully deductible. EXAMPLE 11: Bart, a self-employed individual, drove his car 6,000 business miles and 4,000 nonbusiness miles during the year. He reports the following auto expenses: Gas and oil $1,500 Repairs and maintenance 400 Insurance 700 Vehicle registration fee 100 Total $2,700 In addition, Bart paid $250 in business parking and tolls. He uses the actual expense method to calculate his business vehicle expense deduction. Bart s car and truck expense deduction is calculated as follows: 1. Calculate the business use percentage of the vehicle. Bart s business use percentage of the vehicle is 60% (6,000 business miles/10,000 total miles). 2. Multiply the total operating expenses by the business use percentage to determine the business operating expenses. $2,700 x 0.6 = $1,620. The business operating expenses are $1,620. 3. Add the business parking and tolls to the amount calculated in Step 2. $250 + $1,620 = $1,870. Bart s car and truck expense deduction is $1,870. The deduction is claimed on line 10, Car and truck expenses. 110
Car and Truck Expenses Other deductible vehicle expenses under actual expense method If the actual expense method is used, and the proprietor owns the vehicle, the proprietor deducts vehicle depreciation on line 13, Depreciation and section 179 expense deduction. If the proprietor leases the vehicle, no depreciation is allowed. The calculation of depreciation, including vehicle depreciation, is discussed in Section 9 of this course. (If the proprietor leases the vehicle, the business rent expense may be deducted on line 20(a), Rent or lease, vehicles, machinery, and equipment, as previously discussed in Section 5 of this course.) The business percentage of personal property tax on vehicles and interest expense on vehicle loans is also deductible on Schedule C. The calculation of the tax and interest expense deductions is the same for the standard mileage rate and the actual expense methods. EXAMPLE 12: The facts are the same as Example 11. In addition, assume that Bart paid the following: State and local personal property tax on his vehicle $ 250 Interest expense on the vehicle loan 1,200 Bart s business use percentage for the vehicle is 60%, as calculated in Example 11. Therefore, Bart may deduct 60% of both the personal property tax and the interest expense on Schedule C. The deduction for the personal property tax is $150 ($250 x 0.6). The deduction is reported on line 23, Taxes and licenses. The deduction for the interest expense is $720 ($1,200 x 0.6). The deduction is reported on line 16(b), Interest, other. Recordkeeping If a proprietor uses the actual expense method, he or she must maintain all of the records previously discussed for the standard mileage rate method. In addition, the proprietor must document the nature, amount, and date of vehicle operating expenses, including gas, insurance, repairs, etc. 3 111
Mastering Tax Preparation for Sole Proprietors Comprehensive Example Erin, a self-employed caterer, owns a car that she drives for both business and personal use. Her mileage log reports the following for 2002: Business miles driven 7,000 Total miles driven 10,000 During 2002, Erin paid the following automobile expenses: Gas and oil $600 Insurance 700 Repairs and maintenance 540 Vehicle registration fee 120 Interest expense car loan 800 Vehicle personal property tax 180 Business parking and tolls 60 Standard mileage rate method If Erin uses the standard mileage rate method, her 2002 car and truck expense deduction is calculated as follows: Business miles driven 7,000 Standard mileage rate x.365 Business auto expense $2,555 Business parking and tolls + 60 Car and truck expense deduction $2,615 In addition, Erin may deduct the business percentage of her interest expense and personal property tax. For 2002, the business percentage is 70% (7,000 business miles/10,000 total miles). Thus, she may deduct $560 ($800 x 0.7) of interest expense and $126 ($180 x 0.7) of personal property tax on Schedule C. 112
Car and Truck Expenses To summarize, Erin reports the following on her Schedule C: Car and truck expense line 10 $2,615 Interest, other line 16(b) 560 Taxes and licenses line 23 126 Actual expense method If Erin uses the actual expense method, her car and truck expense deduction is calculated as follows: Actual operating costs Gas and oil $ 600 Insurance 700 Repairs and maintenance 540 Vehicle registration fee 120 Total $1,960 Business use percentage x 0.7 Business operating expenses $1,372 Business parking and tolls + 60 Car and truck expense deduction $1,432 In addition, Erin may deduct the business percentage of her interest expense and personal property tax. These deductions are the same for both the standard mileage rate and the actual expense method. Finally, Erin may deduct vehicle depreciation, as discussed in Section 9. To summarize, Erin reports the following on her Schedule C: Car and truck expense line 10 $1,432 Interest, other line 16(b) 560 Taxes and licenses line 23 126 In addition, she will deduct vehicle depreciation on line 13, Depreciation and section 179 expense deduction. 113
Mastering Tax Preparation for Sole Proprietors Schedule C, Part IV, Information on Your Vehicle If car and truck expenses are deducted on line 10 of Schedule C, a proprietor may be required to provide information about the business vehicle in Part IV of Schedule C. If Form 4562, Depreciation and Amortization, is filed for the business, Part IV of Schedule C is not required. If Form 4562 is not filed, Part IV must be completed. Form 4562 is discussed in Section 9 of this course. Refer to Part IV of Schedule C, reproduced in Figure 6-1 below as you study the line-by-line instructions for its completion. Line 43 This line reports the date the vehicle was placed in service for business purposes. If the vehicle was converted from personal to business use, enter the date of conversion. Line 44 This line reports the total business, commuting, and other mileage for the current tax year. Lines 45-47 These lines are self-explanatory. FIGURE 6-1 Schedule C, Part IV Part IV Information on Your Vehicle. Complete this part only if your are claiming car or truck expenses on line 10 and are not required to file Form 4562 for this business. See the instructions for line 13 on page C-4 to find out if you must file. 43 When did you place your vehicle in service for business purposes? (month, day, year) / /. 44 Of the total number of miles you drove your vehicle during 2002, enter the number of miles you used your vehicle for: a Business b Commuting c Other 45 Do you (or your spouse) have another vehicle available for personal use?............. Yes No 46 Was your vehicle available for personal use during off-duty hours?................ Yes No 47a Do you have evidence to support your deduction?......................... Yes No b If Yes, is the evidence written?................................... Yes No 114
Car and Truck Expenses NOTES 1. IRS Publication 463, Travel, Entertainment, Gift & Car Expenses. 2. For a comprehensive list of vehicle operating expenses, see IRS Publication 463, Travel, Entertainment, Gift & Car Expenses. 3. For additional information on recordkeeping requirements, see IRS Publication 463, Travel, Entertainment, Gift & Car Expenses. 115
Mastering Tax Preparation for Sole Proprietors AE9J! CAR AND TRUCK EXPENSES Problem I. Mark each statement True or False.! The cost of commuting from home to your regular work location is a nondeductible personal expense. " The cost of parking at your regular business location is a deductible business expense. # If a proprietor owns a car used for business purposes, the proprietor may change from the standard mileage rate method to the actual expense method. $ The standard mileage rate method may be used for leased vehicles, provided the method is used for the entire lease period. % In general, the cost of transportation between business locations is deductible. & In order to deduct vehicle expenses, a proprietor must maintain records, such as a mileage log, documenting business use of the vehicle. ' The business percentage of personal property tax on vehicles is deductible on Schedule C. 116
Car and Truck Expenses ( Under the standard mileage rate method, a deduction for vehicle depreciation may be claimed on Schedule C. ) Under the standard mileage rate method, a proprietor must maintain detailed records supporting the date, amount, and type of vehicle operating expenses.! Interest expense on vehicle loans is strictly nondeductible on Schedule C. Problem II. Multiple choice. Circle the correct answer. Use the following information for Questions 1-3. Stuart, a self-employed accountant, reports the following mileage: Home to and from Stuart s office 3,000 Home to and from in-town client offices 2,500 Home to and from an out-of-town business seminar 600 Home to and from out-of-town client offices 700 Other nonbusiness mileage 5,000 Total miles driven 11,800 Stuart s regular work location is an office located in a downtown business suite. Stuart paid $100 for business parking and tolls.! Which of the following is personal mileage? a. Home to and from Stuart s office b. Home to and from in-town client offices c. Home to and from the out-of-town business seminar d. Home to and from out-of-town client offices 117
Mastering Tax Preparation for Sole Proprietors " If Stuart uses the standard mileage rate method, what is his 2002 car and truck expense deduction? a. $3,540 b. $2,140 c. $1,487 d. $1,600 # What is Stuart s business use percentage for the vehicle? a. 32.20% b. 11.02% c. 57.63% d. 21.19% $ If a proprietor uses the standard mileage rate method, he may deduct... a. the business percentage of interest expense on a vehicle loan. b. vehicle depreciation. c. the business percentage of vehicle insurance. d. the business percentage of gas and oil. % If a proprietor uses the standard mileage rate method,... a. she is not required to document business miles driven during the tax year. b. she is not required to document the actual amount spent on gas and oil during the tax year. c. she is not permitted to deduct vehicle personal property tax. d. she is not permitted to deduct business parking and tolls. 118
Car and Truck Expenses AE9J! C_\edY_^cQ^T5h`\Q^QdY_^c Problem I.! True " False The cost of parking at your regular business location is a nondeductible personal expense. # True $ True % True & True ' True ( False The standard mileage rate includes an allowance for depreciation. Therefore, no additional deduction is permitted. ) False These records are not required for the standard mileage rate method.! False The business percentage of interest on vehicle loans is deductible on Schedule C. 119
Mastering Tax Preparation for Sole Proprietors Problem II.! a Commuting is personal mileage. " c Stuart drove a total of 3,800 business miles (2,500 + 600 + 700). To calculate his deduction, Stuart multiplies his business miles by the standard mileage rate and adds the business parking and tolls. Thus, the deduction is $1,487 [(3,800 miles x $.365/mile) + $100]. # a The business use percentage is 32.20% (3,800 business miles/11,800 total miles). $ a The standard mileage rate includes an allowance for vehicle depreciation and vehicle operating expenses, such as insurance, gas, and oil. However, it does not include an allowance for interest expense on vehicle loans. % b Documentation of vehicle operating costs is not required for the standard mileage rate method. 120
Car and Truck Expenses AE9J" CAR AND TRUCK EXPENSES NOT SHOWN 121