Oak Brook Business Tax Planning: Shift tax gears on biz vehicles

QTA Consultants, Ltd./Renata Bliumaite

Oak Brook Business Tax Planning: Shift tax gears on biz vehicles

The IRS allows most business drivers to benefit from a convenient standard mileage rate. But this often isn’t the best option.

Strategy: Compare the standard mileage rate to the actual expense method. Despite the extra recordkeeping hassles, the latter often produces a bigger annual deduction, especially if you switch early in the year. The IRS recently announced that the standard mileage rate for 2025 is 70 cents per mile (plus business-related tolls and parking fees), up three cents per mile from the 2024 rate. (IR-2024-312, 12/19/24)

Here’s the whole story: When you use a vehicle for business driving, you can deduct your outof-pocket expenditures—gas, oil, repairs, insurance, registration fees, tires, etc.—attributable to the business use of the vehicle, plus a potential depreciation allowance. Similarly, you can take a deduction for a leased vehicle, but you might have to report an “inclusion amount” that slightly reduces your deduction. However, in lieu of writing off actual expenses, business drivers can claim the IRSapproved standard mileage rate deduction. In this case, you don’t have to keep track of all your operating expenses, but you still must document the date, place, business relationship and business purpose of each trip and the mileage. The standard mileage rate method is easier to use, but the actual expense method is likely to produce a bigger deduction. Frequently, the key to the comparison is the depreciation allowance available to business drivers using the actual expense method. On the other hand, depreciation is already built into the standard mileage rate, but it’s a modest amount. To further tilt things in favor of the actual expense method, the Tax Cuts and Jobs Act (TCJA) hiked the limits for depreciation deductions on so-called “luxury autos,” as well as allowing bonus depreciation available for the first year a vehicle is placed in service and used over 50% for business. For luxury autos placed in service in 2024 and used 100% for business, the TCJA depreciation deduction limit for the first year is $12,400 (indexed annually for inflation), plus a bonus depreciation deduction of $8,000. The 2025 limit hasn’t been released yet. These figures must be adjusted downward if your business use is less than 100%, but they still provide tax incentives to use the actual expense method. Example: Normally, you drive 12,000 business miles a year. For simplicity, say you acquired your car in January, and the total depreciation allowance for 2025, including bonus depreciation, will be $15,000. You begin keeping the records needed for the actual expense method in the second half of the year. The estimated cost of driving the car, including all the expenses stated above, is 35 cents a mile (half the standard mileage amount). Also, you expect to incur $500 in business-related parking fees and tolls for the year. Now let’s compare the two methods. • If you use the standard mileage rate, your deduction for 2025 is limited to $8,900 (12,000 miles x 70 cents per mile + $500). • If you use the actual expense method, you can deduct $4,200 (12,000 miles x 35 cents per mile + $500), plus $15,000 in depreciation, for a total of $19,200. Result: You come out a whopping $10,300 ahead with the actual expense method ($19,200 − $8,900)—more than double the standard mileage amount.

Tip: Crunch the numbers for your situation.