The Standard Mileage Rate

If you use the standard mileage rate (SMR) method, you calculate the fixed and operating costs of your vehicle by multiplying the number of business miles traveled during the year by the business standard mileage rate. This rate is set by the IRS and adjusted annually.

In response to increased gasoline costs, the IRS increased the standard mileage rate for business, moving and medical use of a car in the middle of 2011. Therefore, the amount that you can deduct will depend upon when you drove the vehicle.

• From January 1, 2011 through June 30, 2011, the standard mileage rate for business miles was 51 cents per mile.
• From July 1, 2011 through December 31, 2011, the standard mileage rate for business miles was 55.5 cents per mile
• For 2012, the standard mileage rates for business miles remains at 55.5 cents per mile.

While very simple to use, the SMR is not available to everyone. Specifically, this rate may not be used to compute the deductible expenses for:

• four or more vehicles owned or leased by a taxpayer and used simultaneously, as in fleet-type operations (this does not include situations where you own more than one vehicle, such as a car and a truck, but you don't use them at the same time; in that case, you can still use the SMR);
• vehicles depreciated using any method other than straight line (e.g., MACRS) or for which you claimed any special depreciation allowance (e.g. bonus depreciation;)
• vehicles for which you claimed a section 179 deduction;
• vehicles that you lease if you have claimed actual car expenses;
• vehicles where you elected to use the actual cost method in the first year the car was in service; and
• vehicles used by a rural mail carrier who received a qualified reimbursement

Tip The standard mileage rate can be used for cars that you lease, not just those that you own, provided that you used this method initially and continue to use this method for the entire lease term.

If you want to use the standard mileage rate for a car, you must use it in the very first year you place it in service for your business. If you do that, in later years you can switch between the actual cost method, and the standard mileage rate, depending on which method yields the bigger deduction in any given year. However, once you use the standard mileage rate, you must use the straight-line method of depreciation if you switch to the actual cost method.

Ordinarily, straight-line gives you a smaller deduction than the quicker MACRS method of depreciation. The SMR and MACRS are basically incompatible, and if you've ever used MACRS for a car, you can never use the SMR method for that car.

What's included in the SMR? Using the standard mileage rate takes the place of deducting almost all of the operating and fixed business costs of your vehicle, such as maintenance and repairs, tires, gas, oil, insurance, and license and registration fees. However, you can still deduct parking fees and tolls that are directly related to business (i.e., not commuting) in addition to the SMR. For business owners, interest on loans for vehicles and taxes attributable to the operation of these vehicles are also deductible in addition to the SMR.

When you use the standard mileage rate method, a specific amount is included for depreciation. This means that you can't claim an additional deduction for depreciation when you use the SMR. It also means that if you use the SMR, when you sell your car and need to determine whether you had any taxable gains, you must adjust the basis of your vehicle for each year the method was used.

For each year the standard mileage rate has been used, you must multiply your business mileage for the year by the amount shown in the chart, and then reduce your car's tax basis (and increase your potential taxable gains) by that amount.

Example In 2006, you bought a car for exclusive use in your business. The car cost $22,500. From 2006 through 2011, you used the standard mileage rate to figure your car expense deduction. The miles driven in each year are shown below. The depreciation is figured as follows. Year Miles Driven Adjustment Amount Depreciation 2006 16,300 0.17 $2,771 2007 15,600 0.19 $2,964 2008 16,700 0.21 $3,507 2009 15,100 0.21 $3,171 2010 14,900 0.23 $3,427 2011 15,500 0.22 * $3,410 Total $19,250 * Although the mileage rate was adjusted upwards mid-year in 2011, the basis reduction adjustment amount was not changed. It remains at 0.22 for all business miles driven in 2011. At the end of 2011, your adjusted basis in the car is $3,250 ($22,500 - $19,250).