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Business and other standard mileage rates decrease for 2016

Notice 2016-1, 2016-02 IRB; IR 2015-137

IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will decrease by 3.5¢ to 54¢ per mile for business travel after 2015. This rate can also be used by employers to provide tax-free reimbursements to employees who supply their own autos for business use, under an accountable plan, and to value personal use of certain low-cost employer-provided vehicles. And, the rate for using a car to get medical care or in connection with a move that qualifies for the moving expense will decrease by 4¢ to 19¢ per mile.

Background. The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, still claim separate deductions for parking fees and tolls connected to business driving. (Rev Proc 2010-51, 2010-51 IRB 883, see Weekly Alert ¶  4  12/09/2010)

Employers that require employees to supply their own autos may reimburse them at a rate that doesn’t exceed the business mileage allowance for employment-connected business mileage, whether the autos are owned or leased. (Rev Proc 2010-51, Sec. 9.01) The reimbursement is treated as a tax-free accountable-plan reimbursement if the employee substantiates the time, place, business purpose, and mileage of each trip. Additionally, an employee’s personal use of lower-priced company autos may be valued at the optional mileage allowance if the conditions specified in Reg. § 1.61-21(e)(1) are met.

A separate rate applies for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction. (Rev Proc 2010-51) The mileage rate for driving an auto for charitable use (14¢ per mile) is a statutory rate that’s not adjusted for inflation. (Code Sec. 170(i))

IRS generally adjusts the standard mileage rate annually, based on a yearly study of the fixed and variable costs of operating an auto. However, IRS has made mid-year adjustments in certain years when necessary to better reflect the real cost of operating an auto in light of rapidly rising gas prices.

RIA observation: The advantages to using the standard mileage rate include:
…Mileage rate users need not keep a record of actual expenses or retain receipts that would otherwise be required. A record of the time, place, business purpose and number of miles traveled suffices.
…If an auto’s business expenses are deducted via the mileage rate, it is not subject to the Code Sec. 280F dollar caps or the special rules that apply if qualified business use does not exceed 50% of total use.
…The mileage rate method may yield bigger deductions than the actual expense method for a thrifty, high-mileage-per-gallon model.
RIA observation: Gas prices have been dropping recently, which could further weigh in favor of using the standard mileage rate as opposed to the actual expense method.

Standard mileage rates for 2016. Notice 2016-1 provides that the standard mileage rate for transportation or travel expenses is 54¢ per mile for all miles of business use (business standard mileage rate). The standard mileage rate is 19¢ per mile for use of an auto (1) for medical care described in Code Sec. 213; or (2) as part of a move for which the expenses are deductible under Code Sec. 217. The standard mileage rate is 14¢ per mile for use of an auto in rendering gratuitous services to a charitable organization under Code Sec. 170. (Notice 2016-1, Sec. 3)

As Notice 2016-1 notes, taxpayers using the standard mileage rates must comply with Rev Proc 2010-51. Accordingly, the standard mileage rate may not be used for a purchased auto if:

…it was previously depreciated using a method other than straight-line for its estimated useful life;
…a Code Sec. 179 expensing deduction was claimed for the auto;
…the taxpayer has claimed the additional first-year depreciation allowance for the auto;
…the taxpayer depreciated it using MACRS under Code Sec. 168; or
…the taxpayer is a rural mail carrier who receive qualified reimbursements. (Rev Proc 2010-51)

A taxpayer who uses the mileage allowance method for an auto he owns may switch in a later year to deducting the business-connected portion of actual expenses, so long as he depreciates it from that point on using straight-line depreciation over the auto’s remaining life. The depreciation deductions would still be subject to the Code Sec. 280F dollar caps. (Rev Proc 2010-51, Sec. 4.05(3))

RIA observation: One of the disadvantages to using the standard mileage rate is that the mileage rate method may produce a smaller deduction than would be obtained by claiming actual business-connected operating expenses plus depreciation (or lease payments). Also, use of the mileage rate method prevents the taxpayer from claiming regular MACRS deductions (subject to the luxury auto dollar caps) for the auto in later years.

Depreciation. For 2016, Notice 2016-1, Sec. 4 provides that the depreciation component of the mileage rate for autos used by the taxpayer for business purposes is 24¢ per mile. (It was 24¢ per mile for 2015; 22¢ per mile for 2014; 23¢ per mile for 2013; and 23¢ for 2012.) The depreciation component reduces the basis of the auto for gain or loss purposes. (Rev Proc 2010-51, Sec. 4.04)

FAVR plans. A taxpayer may use the mileage allowance method for a leased auto only if he uses that method (or a fixed and variable rate (FAVR) allowance method) for the entire lease period. (Rev Proc 2010-51, Sec. 4.05(2)) Employers may use a FAVR allowance method to reimburse employees who supply their own cars for business (whether the cars are leased or owned). For 2016, the standard auto cost used to compute the FAVR allowance cannot exceed $28,000 (down from $28,200 for 2015). For trucks or vans, the 2016 standard auto cost used to compute the FAVR allowance cannot exceed $31,000 (up from $30,800 for 2015). (Notice 2016-1, Sec. 5)

When the new rates are effective. The revised standard mileage rates in Notice 2016-1 (54¢ for business; 19¢ for medical or moving) apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes on or after Jan. 1, 2016, and to mileage allowances or reimbursements that are paid to an employee or charitable volunteer (1) on or after Jan. 1, 2016, and (2) for transportation expenses paid or incurred by the employee or charitable volunteer on or after Jan. 1, 2016. (Notice 2016-1, Sec. 6)

References: For the optional mileage allowance, see FTC 2d/FIN ¶  L-1903; United States Tax Reporter ¶  1624.157; TaxDesk ¶  293,005; TG ¶  17680.