Archive for Listed Property

Increase Your Tax Deductions—Switching from the IRS Mileage Rate to Actual Expenses

Do you feel like you’re not getting as much as you should from your business vehicle mileage deductions? For some business owners, gas and maintenance for a vehicle can be significant business expenses. If you’re not already using the actual expense method to calculate your mileage deduction, that may be your ticket to getting more from your vehicle expenses.

Usually, you’ll make a decision once regarding whether to use the IRS mileage rate for your deductions or to use the actual-expense method. If you choose the IRS mileage rate, you also lose out on MACRS depreciation.[1] However, you’re not locked into your choice forever. You have two different options for switching to claiming actual expenses.

Option 1: Amending Your Tax Return

If you realize fairly quickly that you’ve made the wrong decision in choosing to use the IRS mileage rate, you can act quickly and change your decision. That means you’ll have to file an amendment to your tax return before its original due date (if you filed extensions, the deadline includes the extensions).[2]

This option is fairly easy to enact. You’ll file the amendment, electing actual mileage expenses, Section 179 deductions, and MACRS depreciation. But, you have to act fast. This method essentially replaces the election on your original tax return.

Option 2: Straight-Line Depreciation

If you’ve already missed out on your chance to amend your return, you do have other options. You could still switch to the actual-expense method with MACRS depreciation, but you’ll have to get permission from the IRS commissioner . . . if you enjoy wasting time and money with the possibility of rejection.[3] Let’s be smart here; the commissioner is not a good option.

Instead, you can opt for straight-line depreciation for the remainder of your vehicle’s useful life.[4] This allows you to make the actual expense deductions. For calculating the straight-line depreciation, you’ll need the following information on your vehicle:[5]

  • Its Adjusted BasisThis is typically the original cost of the vehicle minus depreciation. When you use the IRS mileage rate, depreciation is included in it (22 cents per mile in 2014 and 24 cents per mile in 2015).[6] If you pay $30,000 for your car and drive it 5,000 miles for business (with no personal miles), you would calculate your depreciation at 5,000 miles x $0.22, which equals $1,100. Your adjusted basis is $28,900 ($30,000 – $1,100).
  • Its Estimated Remaining Useful LifeYou don’t need to think too hard about this. It’s simply how long you expect to keep the vehicle.[7] We’ll call it 5 years for our example.
  • An Estimate of Its Salvage Value when the Useful Life EndsTo get a salvage value, you should use a respected pricing source, such as Kelly Blue Book. In our example, the value is what you estimate you could sell the vehicle for in 5 years (the remaining useful life). Let’s say this number is $4,000. Don’t forget to document where you get this number from!

Now, when you switch to actual mileage expenses, the IRS gives you a bonus on the salvage value if you plan to keep the vehicle for more than three years. Our example vehicle meets that requirement, which means you can reduce the salvage value by $3,000 (10 percent of the basis). If 10 percent of the basis exceeds the salvage value, that’s no problem. You’ll simply claim a salvage value of zero.

An Additional Consideration

When claiming actual expenses, you’ll have to pay attention to the luxury vehicle depreciation limits. These apply to passenger vehicles, and the limits differ between cars, vans, and trucks. You’ll need to find the amounts for the year you placed your vehicle in service.

For 2014 the limits for cars placed in service that year are:

The limits for vans and trucks are:

Note: These are amounts for used vehicles only. If your leased or purchased a new vehicle, use the tables in Rev. Proc. 2014-21 . Regardless of the type of vehicle or whether it is new or used, you must reduce the limit by your personal use. So, if you use your car for 80 percent business and 20 percent personal purposes, your first year limit is $2,528. If these limits affect your depreciation, you can simply claim the rest of the depreciation in a later year—you do not lose it.

Some vehicles are exempt from the luxury limits. Your truck, van, crossover, or SUV may be exempt if it 1) is classified as a truck by the Department of Transportation, and 2) has a gross vehicle weight rating over 6,000 pounds. Note that some passenger trucks are not classified as a “truck” by this definition.

If you don’t like the choice you made for your mileage deductions, you can fix it. If you catch it early, you’ll still get all the additional benefits that come with the actual-expense method (Section 179 expensing and bonus depreciation). However, if you make the switch later, you can still get some benefit from actual expense deductions with straight-line depreciation. What you need to know is that the choice to switch is available to you.

  1. Rev. Proc. 2010-51; IRC Section 168(f)(1)
  2. Reg. Section 301.9100-2(d)
  3. Rev. Proc. 2011-14, Appendix 6.02
  4. Rev. Proc. 2010-51
  5. IRS Pub. 534, Depreciating Property Placed in Service Before 1987, (Rev. Nov. 1995), p. 7
  6. Notice 2014-79;,-Medical-and-Moving-Announced
  7. IRS Pub. 534, Depreciating Property Placed in Service Before 1987, (Rev. Nov. 1995), p. 7

Did You Know Your Car Can Accelerate Your Tax Savings?

Would you like thousands, or even tens of thousands, more dollars in tax deductions every year? Of course you would! To boost your deductions, you can count on your vehicle to be a deduction generator if you use it to drive from one business location to another. The only thing you have to do is keep the right records in order to prove your business mileage. Your tax records, like your car, require regular maintenance in order to function properly.

The Documentation You Need

We can look at the court case of salesman, Marcus Crawford, for an example of what a difference minor deviances in documentation can make.[1] Crawford spent much of the work day driving to meet customers. He tried to defend is vehicle deductions in an amount greater than $20,000 by providing 1) destination notes on his daily calendar, and 2) saved gas receipts. Although this sounds like decent record keeping, the IRS rejected this documentation and Crawford got none of the deductions. Zero.

Unfortunately for Mr. Crawford, the IRS is pretty strict about documentation for vehicle deductions. Here’s what you actually need in order to qualify:[2]

  1. A mileage log
  2. Receipts that support your mileage log

Crawford’s proof didn’t work because it failed to document the true number of miles spent driving to each location and how the location was related to his business activities. A proper log divides mileage into the appropriate categories:

  • Personal mileage
  • Commuting mileage
  • Business mileage
  • Investment mileage
  • Rental property business mileage

Here’s a hypothetical example:

Note that rental property mileage should be calculated separately from other business mileage. This is so you can determine Section 179 expensing for your vehicle. Additionally, you see that the miles marked for the trip to the grocery store are zero. Why? It’s because the stop was located on the way between two other stops, so it does not generate any additional mileage.[3] Although the grocery trip is a personal stop, you would have had to drive the same distance from one office to the other whether you stopped for groceries or not.

In some cases, it may be more convenient to group the mileage together for multiple stops. This is perfectly fine as long as you document it that way. For example, a real estate professional may make a note indicating multiple stops to show the same client six different properties. These six stops can go together on one line of your mileage log.

Simplifying Your Record-Keeping by Sampling

Writing down every single stop you make every day for the entire year sounds fun, right? Not so much. If tracking your mileage is starting to sound like too much work to even be worth it, keep reading. Per the IRS, you are allowed to track your mileage for only part of the year, and then use that sample to calculate your total business mileage for the rest of the year. You have two options:[4]

  1. Keep a mileage log one week out of every month, or
  2. Keep a mileage log for three consecutive months.

By using the second option, you can log your mileage for one three-month period and then forget about it for the rest of the year. This is the better way to go because the one week a month method increases your risk of missing a month, and when that happens, the IRS no longer accepts your records. It does not accept “almost” with mileage logs.

There is one little catch. If you use the three consecutive months method, those months must be representative of your driving habits for the entire year. For those of you who work in a business with noticeable seasonal fluctuations in your business mileage, you’d better stick to the one week a month strategy.

Supporting Your Log

Okay, so you’ve logged your mileage and labeled its category for either three consecutive months, or one week out of each month for the year. You’re all set, right? Not so fast. The IRS isn’t so trusting that it will just accept the records you’ve individually recorded. So, you’ll have to back up your mileage sheets with evidence from other sources that match your records.

Some documents the IRS may request during an audit include:[5]

  • Inspection slips, repair receipts, and any other records that record your vehicle’s total mileage
  • A copy of your calendar or appointment book that indicates your business activities for the year
  • A copy of your mileage log

Each of these proofs will be cross-referenced with each other to ensure that everything matches up. That means if your gas receipt shows you were in Henderson, NV on a day your mileage log shows you staying in Riverside, CA, you’ve set off a red flag that may cancel your deductions.

What If You Don’t Keep Paper Records

Certainly many business people are switching over to digital record keeping. If you prefer to track mileage on an app, that’s no problem. However, it may be a good idea to keep paper print-outs as backup until you’re certain the app’s records meet the requirements of the IRS. Always keep some kind of backup of your digital records. You never know when a glitch, virus, or hacker may delete all your records, or render your app inactive.

Tracking your vehicle mileage isn’t too difficult once you set up a system for yourself. Remember, you only have to do it for part of the year. The IRS mileage rate for deductions is $0.56 per mile, so with the right documentation, you can claim thousands in deductions just by going about your normal work routine.

  1. Marcus O. Crawford, TC Memo 2014-156.
  2. IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses (2013), Dated Jan. 14, 2014, p. 25-27.
  3. Reg. Section 1.274-5T(c)(6)(i)(C).
  4. Reg. Section 1.274-5T(c)(3)(ii)(A).
  5. Internal Revenue Manual Exhibit 4.13.7-20 — Examination Documentation Requirements Paragraphs – Cont. 6 [09-01-2006].

Why Running a Corporation Increases Your Cell Phone Tax Deductions

It’s no secret that how you run your company—as a proprietorship, an LLC, or a corporation—affects your tax deductions. In many cases, corporations get the biggest advantages, and that is the case with business cell phone expenses. This article will give you advice for getting the most out of your corporate advantage on cell phone deductions, as well as the requirements for other business owners.

History of Cell Phone Deductions

Did your corporation pay for, or reimburse you for, a business-purpose phone? If so, your corporation gets to deduct both the cell phone’s cost and its usage charges. Does that sound like a good deal? Well, it is—because sole proprietors and single-owner LLCs do not have this advantage! (Keep in mind, however, that partnerships and LLCs run as partnerships are eligible for the same deductions as corporations in this scenario.)

Why are corporations the only entities to cash in on this situation? It goes back to the listed property rules. These tax rules were applied to cell phones all the way back in 1989, and although listed property creates several hoops for taxpayers to jump through, the one that applied to cell phones was the requirement to log both business and personal use. You may be familiar with this requirement in the form of your business vehicle’s mileage log.

But, that’s just where the situation started. In 2010, cell phones were removed from the listed property category. Legislators realized that they simply do not fit in this group. The removal was accomplished through the Small Business Jobs Acts[1].

Corporate Advantage

So, why are some small business owners still getting the shaft? First off, the newer act did not address how to tax personal cell phone use. Then, in 2011, the IRS laid down cell phone guidelines. And, they address cell phone use for employees. As the owner of a corporation, you are considered an owner-employee because your corporation is a fully separate entity from you—not so for the owner of a proprietorship or LLC.

Here’s what the IRS decided[2]:

  • No records need to be kept regarding personal vs. business use of employees’ cell phones, and employer-provided cell phones will not be taxed for personal use.
  • To qualify for this tax advantage, the reason for providing an employee with a cell phone must be mainly for “noncompensatory business purposes”. That means one of the following (or a similar situation) must apply:
  1. The phone allows the employer to contact the employee regarding work-related emergencies at any time;
  2. The employee is required to speak with clients when away from the office; or
  3. The employee is required to talk to clients in other time zones, which may fall outside regular workday hours.

For a corporate owner-employee, it should be fairly easy to meet at least one of those requirements. In fact, your company doesn’t even need to purchase a cell phone for you. You can use your personal cell phone and have the corporation reimburse you or provide a cash allowance for phone usage[3]. That means no logging usage for you (or your corporation), and you still get the deduction! That’s right. As long as you pay a fixed monthly fee (not pay as you go), then your corporation can reimburse you for the entire amount—even if you use the phone for personal calls, too.

What about Other Business Owners?

Because of the differences in business structure, sole proprietors and LLC owners are not considered owner-employees. That means these hassle-free tax breaks apply to your employees and not to you. However, you can still deduct your monthly business-related cell phone costs. You’ll just have to calculate the amount for personal use. Your business-related cell phone use will be deducted like any other business expense, and you depreciate your cell phone’s cost.

Basically, you still benefit from cell phones no longer counting as listed property, but you do have to log usage. So, if you tally up the usage hours for the year, and 80 percent of those were business-related hours, then you can monthly fee and depreciation deductions are for 80 percent of the total.

Important: You will need to document those calls to prove the 80 percent business use. But, don’t droop your head! You can do this easily by simply taking a pen to your phone bill and marking which calls were business and which were personal[4]. Here’s another bit of good news: you don’t need to pour over every phone bill for the entire year. The IRS allows you to take a sample, three months for instance, and apply it to the year if you make about the same number of business calls each month[5]. Or, just save yourself some time and get two phone numbers for your cell.

For employees: Be aware that cell phones given as an incentive or morale booster are counted as taxable income[6].

A Note on Independent Contractors

If you are an independent contractor, you get tax-free, tax-favored employee status for your cell phone, as long as your cell phone is reimbursed by or given to you by an employer. That employer can be a broker, customer, client, etc.[7] In all other circumstances (your phone usage is not reimbursed), you are considered a proprietorship and must prove your usage for deductions.

With all its distinctions for various groups and categories, tax laws will always end up providing an advantage to one group or another. In the case of cell phones (and many other fringe benefits) corporations and their owner-employees get the edge on tax deductions. Whatever type of company you run, make sure you know the rules so you can get the most from your tax return.

  1. P.L. 111-240: IRC Section 2043.
  2. IRS Notice 2011-72; See also IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits (for use in 2012; updated Dec. 7, 2011), p. 12.
  3. IRS Memorandum for All Field Examination Operations, Sept. 14, 2011.
  4. Umit Tarakci, T.C. Memo. 2000-358.
  5. Reg. Section 1.274-5T(c)(3)(ii)(C), Example 1.
  6. IRS Notice 2011-72; see also IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits (for use in 2012; updated Dec. 7, 2011), p. 12.
  7. IRS Regulation 1.132-1(b)(2)(iv).