January 3, 2022
Like every year, the Internal Revenue Service has lately introduced the inflation-adjusted 2022 elective standard mileage rates used for the calculation of deductible costs of running a vehicle for business, charitable, medical, or moving purposes.
Effective January 1, 2022, the standard mileage rates for the usage of a vehicle are:
- 58.5 cents per mile driven for business functions (including a 26-cent-per-mile provision for depreciation). This is an increase from 56.0 cents in 2021.
- 18 cents per mile operated for medical care or by an active member of the armed forces for moving functions. This is an increase from 16 cents in 2021, and
- 14 cents per mile for the service of charitable organizations’ miles driven. The business standard mileage rate is primarily generated from an annual analysis of the fixed and variable expenses of operating a vehicle. The price for medical and moving functions is based on the variable costs as defined by the same analysis. The rate for operating a vehicle while conducting services for a charitable organization is statutorily set (it can only be modified by Congressional action) and has been consistent with 14 cents per mile for the past 15 years.
Essential Consideration – The 2022 rates are based on the year of 2021 fuel costs. Because of the possible continuation of significantly higher gas costs, it may be suitable to contemplate switching to the actual price method for 2022, or at least keeping track of the actual costs, as well as fuel expenses, repairs, maintenance, etc., hence the option is accessible for 2022.
Taxpayers always have the choice of determining their actual expenses for using their automobile for business instead of using the standard mileage rates. Additionally, the risk of higher fuel costs, the bonus depreciation, and increased depreciation limits for vehicle passengers that were included in the 2017 Tax Cuts and Jobs Act may make using the actual cost method more beneficial for the first year as an automobile is placed into business service.
Nevertheless, you cannot use the standard mileage rates if you have used the actual method (using Sec.
179, bonus depreciation, and/or MACRS depreciation) in prior years. This regulation is applied on a vehicle-by-vehicle basis. Furthermore, the business standard mileage rate cannot be used for any vehicle for hire use or for more than four automobiles at the same time.
Reimbursement from employers – When employers reimburse workers for business-related vehicle expenses using the standard mileage allowance method for each authorized employment-connected business mile, the reimbursement is tax-free if the employee validates to the employer the time, place, mileage, and purpose of employment-connected business travel.
The Tax Cuts and Jobs Act removed employee business expenses from the itemized deduction, effective from 2018 through 2025.
As a result, employees cannot deduct unreimbursed employment-related vehicle usage on their federal tax returns during those years. On the other hand, self-employed individuals are qualified to claim expenses for their personal automobiles for business-related purposes.
Quicker Write-Offs for Heavyweight Sport Utility Vehicles (SUVs) – Most of today’s SUVs weigh over 6,000 pounds and are thus not subject to the limit guidelines on luxury vehicle depreciation; individuals with these types of vehicles may utilize both the Section 179 cost deduction (up to a maximum of $27,000) and the bonus depreciation (the Section 179 deduction needs to be applied before the bonus depreciation) to generate a substantial first-year tax deduction. Nevertheless, the automobile may not go above a gross unloaded automobile weight of 14,000 pounds. Attention: Business vehicles are 5-year class life property. If the individual then disposes of the automobile prior to the end of the 5-year period, as most of them do, a part of the Section 179 expense deduction will be evoked and ought to be added back to the income (SE income for self-employed individuals).The upcoming consequences of deducting all or a large portion of the automobile’s cost using Section 179 should be considered.
Bonus Depreciation to be considered – Using bonus depreciation should be considered as an option to the Section 179 deduction.
Under this provision, an individual may choose to claim a deduction of 100% of the expense of a new or used vehicle for business-related use through the first year it is placed in business service. Nevertheless, the luxury vehicle guidelines require a maximum annual deduction for depreciation with bonus depreciation. For instance, in 2021, the highest depreciation deduction for a vehicle for which the bonus depreciation was claimed was $18,200. This contrasts to a maximum of $10,200 if bonus depreciation isn’t adopted. Undoubtedly, if the automobile is just partially used for business, then only the percentage of the expense of the business use is qualified to be deducted.
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