How Long Can You Deduct Standard Mileage on the Same Vehicle?

How Long Can You Deduct Standard Mileage on the Same Vehicle?

To get in the right frame of mind for this blog, we recommend listening to I’m in Love with My Car by Queen.

If you or your client have a love for your car (business use love, that is) and you never want to get rid of it, you might ask yourself if there is a limitation as to how many years you can use the standard mileage deduction for the car’s business use.

Why would this topic even be up for discussion? Depreciation is the answer.

While you might think that when a client uses the standard mileage deduction, depreciation isn’t an issue, you would be wrong as there is a factor for depreciation in every business mile a vehicle is driven.

Here’s the depreciation factors within the standard mileage amount since 2000:

(Source:  IRS Publication 463)

Let’s put the table into perspective with an example of the point I’m making. Your client purchased his dream car in 2000 for $50,000. He is definitely in love with his car since he still owns it now in 2021. His business-use miles have averaged 12,000 miles per year, and he used standard mileage each year for 2000 through 2020. If you were to crunch the depreciation component for each year you would discover your client has deducted more standard mileage than the vehicle cost.

The vehicle cost was $50,000, yet we’ve deducted $52,200. Is there a problem? It’s actually hard to determine, as you could conclude that the IRS contradicts itself in Pub. 463. While I understand that IRS publications are not substantial authority, there isn’t really any other IRS source to provide guidance. In one section, it explains that each business mile will reduce the basis of the vehicle by the depreciation factor illustrated earlier, but as the Pub states, not below $0.  However, the Pub goes on to explain that you don’t reduce the standard mileage rate for the depreciation factor even if the basis has reached $0.  The actual language used is:

“If your basis is reduced to zero (but not below zero) through the use of the standard mileage rate, and you continue to use your car for business, no adjustment (reduction) to the standard mileage rate is necessary. Use the full standard mileage rate (57.5 cents (0.575) per mile for 2020) for business miles driven”

In our example, it would appear we can continue to take the total standard mileage deduction and receive the depreciation component for “free” since the Pub instructs us that the basis of the vehicle will never be reduced below $0. Awareness of this component, however, is still important especially for those business taxpayers who drive an extreme number of miles each year. In 2020, for example, for a client who drove 50,000 miles (I know…that’s a really high number), the depreciation factor for one year would have been $13,500 (50,000 miles x 27 cents per mile). The car’s basis would be reduced to zero in less than four years.

Let’s also not forget that when your client is no longer in love with their car – even though the depreciation factor doesn’t show up on the tax return – the basis was reduced to $0 and anything they receive (up to the depreciation allowed or allowable) upon trade or outright sale will be ordinary income. In our example, if the taxpayer received $5,000 upon trade or outright sale, the $5,000 would be ordinary income under depreciation recapture rules (§1245). Ordinary income recapture would apply up to the full amount of depreciation allowed or allowable (yes that means that ignoring depreciation but doesn’t mean it’s not there). Let’s say our taxpayer really had a one-of-a-kind car and they sold it for $60,000, the gain would be $60,000 since the adjusted basis is $0. But there would be two components of tax: ordinary income under §1245 recapture up the depreciation allowed or allowable, $50,000, to be taxed as ordinary income; the remaining $10,000 of gain never received a tax break so that portion would be treated as a long term capital gain.

You calculate the tax result (including the breakdown between ordinary and capital gain components) on Form 4797, Sales of Business Property.  A couple of takeaways from using the Form 4797:

1. When you used the standard mileage deduction, the expense was reported on Schedule C (for example), which reduced both income tax and self-employment tax.
2. The gain from the sale (ordinary, capital gain or both), does not revert back to the Schedule C. Taxable income, yes, but not subject to self-employment tax.
3. The gain from sale of business property qualifies for the QBID deduction (qualified business income deduction).

One last point I will make about tracking depreciation when using standard mileage: taxpayers seldom keep their cars for as long as we described in our example. Therefore, when they trade or sell their vehicle outright, they may actually have an ordinary loss to deduct. If you have a client who purchased a car in 2019 for that same $50,000. It was used in business during 2019 and 2020. To make things simple, say they drove 12,000 miles per year. They had depreciation components that added up to $6,360 ($3,120 for 2019 and $3,240 for 2020), which reduced their basis to $43,640 ($50,000 – $6,360). In early 2021, they sell the car and receive $35,000. The client has a $8,640 ordinary loss ($43,640 adjusted basis – $35,000 sales price assuming 100% business use) that is fully deductible in the year it was sold (2021). The same result would apply if the car had been traded since like kind exchange rules now only apply to real estate.

There’s another good reason to track that depreciation factor in standard mileage.

One last thought… In the year your client places a vehicle into service, if you’re not certain which way is better to go for deducting the vehicle expenses (standard mileage or actual expenses), you might want to use actual expenses in year one and then switch to standard mileage in year 2. Be careful, however, as the only way you can do this is to not use any accelerated depreciation (MACRS) or expense elections (§179 or Bonus depreciation for example) on the vehicle in year 1. So, if you want to have the ability to switch to using standard mileage from actual expenses, use straight line depreciation in year 1, compare the total of actual expenses to standard mileage and switch in year 2 if you wish once you have a better idea of how the taxpayer is actually using their vehicle for business purposes.

8/24/21 CORRECTION:

I apparently had my facts backwards. You CANNOT switch from actual expenses to standard mileage on the same vehicle. You CAN, however, switch from standard mileage if that method was elected in year 1 to actual expenses in year 2. However, when you make the switch, you may not use any depreciation method other than straight line (no MACRS or expense elections such as §179 permitted).

By Tom O’Saben, EA