Recently, the IRS announced the standard mileage rates for 2021 which outlines the use of a vehicle for business, medical and moving purposes.
This baseline is based on a number of factors in order to determine the standard mileage rates for the following year.
Recently, the IRS announced the 2021 optional standard mileage rates. Thus, beginning on Jan. 1, 2021, the standard mileage rates for the use of a car (or a van, pickup or panel truck) are as follows:
Standard Mileage Rates for 2021
- 56 cents per mile for business miles driven (including a 26-cent-per-mile allocation for depreciation). This is down from 57.5 cents in 2020;
- 16 cents per mile driven for medical or moving* purposes. This is down from 17 cents in 2020; and
- 14 cents per mile driven in service of charitable organizations.
*The deduction for moving is allowed for members of the armed forces on active duty who move due to a military order.
The business standard mileage rate is based on an annual study. This study calculates the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs determined by the same study. For those using an automobile while performing services for a charitable organization the rate is set statutorily. Which means, the rate can only be changed by Congressional action and has been 14 cents per mile for 23 years.
Important Consideration: The 2021 rates take into account 2020 fuel costs. Based on the potential for substantially higher gas prices in 2021, it may be appropriate to consider switching to the actual expense method for 2021. Or at the minimum, consider keeping track of the actual expenses including fuel costs, repairs and maintenance. This would allow it so that the option to switch is available for 2021.
Using The Standard Mileage Rate for 2021 Versus Actual Expense Method
Taxpayers always have the choice of calculating the actual costs of using their vehicle for business rather than using the standard mileage rate. In addition to the potential for higher fuel prices, the 100% bonus depreciation deduction and increased depreciation limitations for passenger autos may make using the actual expense method worthwhile. Generally the first year a vehicle is used for business service.
However, you can not use the business standard mileage if you used the actual method in previous years. In addition, you cannot use the standard rate for any vehicle that is rented out. Nor can the business standard mileage rate be used for more than four vehicles simultaneously.
Employer Reimbursement Using the Standard Mileage Allowance
When employers reimburse employees for business-related car expenses using the standard mileage allowance method the reimbursement is tax-free. But that is only if the employee records the time, place, mileage and purpose of the employment-connected business travel. They also must return any excess payment to the employer.
The Tax Cuts and Jobs Act eliminated employee business expenses as an itemized deduction, effective for 2018 through 2025. Therefore, during this period employees may not take a deduction on their federal returns for unreimbursed employment-related use of their autos, light trucks or vans. Since there is no longer any tax benefit, employees with significant job-related auto usage should consider another plan. We recommend that they ask their employers to set up an accountable plan to reimburse them.
Some folks are able to deduct unreimbursed employee travel expenses. For example, members of a reserve component of the U.S. Armed Forces, state and local government officials paid on a fee basis and certain performing artists.
These folks can use the business standard mileage rate, because they are deductible from gross income rather than as an itemized deduction. Self-employed individuals continue to be able to deduct use of their personal vehicle for business purposes as an expense of the business if properly substantiated.
Faster Write-Offs for Heavy Sport Utility Vehicles (SUVs)
Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the deduction limit rules for luxury auto depreciation. Taxpayers who purchase a heavy SUV and put it into business use in 2021 can utilize two tax rules.
- Both the Section 179 expense deduction, up to a maximum for 2021 of $26,200
- And the bonus depreciation for a considerable first-year tax deduction.
If you claim a Section 179 deduction, it must be applied before the bonus depreciation. And the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. And be aware: Business autos are 5-year class property. If the taxpayer disposes of the vehicle before the end of the 5-year period – there are consequences. The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered. Generally, for vehicles weighing more than 6,000 pounds, using 100% bonus depreciation is the better option.
If you have questions related to the best methods of deducting the business use of your vehicle we can help. Please give this office a call at 360) 778-2901
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