Aside from celebrating the holidays with family and friends, there are only a few other annual events that get accountants really excited. The IRS’ release of the annual standard mileage rates is surely one of them.

Internal Revenue Code Section 274(d) allows taxpayers a deduction for the costs of using their vehicles for various purposes. This code section places very strict and specific documentation requirements on the taxpayer.

Instead of deducting the actual unreimbursed expenses of their vehicles, taxpayers may decide to deduct the standard mileage rate.

Beginning January 1, 2012, the 2012 Standard Mileage Rates are as follows:
Business Use: 55.5 cents per mile
Gratuitous Services to a Charitable Organization: 14 cents per mile
An Automobile used for Medical Care: 23 cents per mile

The standard mileage rate is determined using various factors such as the state of the economy, gas prices, and the estimated cost of normal wear and tear on a vehicle; thus it is intended to reimburse over and above the amounts for which someone pays strictly for gas.

In determining whether to use the actual expenses incurred or the standard mileage rates, consider the following:

1. Are there adequate records to substantiate the deductions? - If you have messy records or are missing receipts and other substantiation for the actual expenses, it makes sense to use the standard mileage rates based upon your driving log. Keeping track of the miles is much easier than keeping all of the receipts. With the technology age, Apps like MileBug make it easier to keep a log and track expenses right on your Smartphone.
2. Which deduction is larger? - In cases where the taxpayer’s vehicle is used 100% for business, the taxpayer’s actual expenses will probably be larger than the standard mileage rates. Where this is not the case, the standard mileage rate may yield a better result.
3. Basis reductions for business use - If a taxpayer uses their automobile for business, a portion of the business standard mileage rate is treated as depreciation, and thus reduces the basis of the automobile by 23 cents per mile for 2012 (22 cents per mile for 2011). When the taxpayer sells or trades in their vehicle, this will cause a higher realized/recognized gain on the transaction.
4. Reimbursement/Allowances - Mileage or travel reimbursement or allowances may reduce or eliminate the deduction.

A member of the KLR Tax Team can help you with questions regarding the correct choice of method for your travel expenses or any of your year-end tax planning needs. Contact us at TrustedAdvisors@kahnlitwin.com or call 888-KLR-8557.

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