Why Depreciate Your Vehicle?

There is a popular misconception that you can take the Standard Mileage Rate and depreciate your vehicle when it is used for your employer's benefit. Let's clear up some of these misconceptions.

First, when you have mileage that can be claimed for the use of your personal vehicle for the benefit of your employer, you cannot claim this mileage if your employer has reimbursed your mileage.

Any mileage that you have that is not reimbursed can be claimed on your personal return on Form 2106 - Employee Business Expenses. Make sure that you have documentation, either a mileage log, etc.

Second, when claiming mileage, you have two choices of how you want to claim the deduction. Either the Standard Mileage Rate or Actual Expenses. The IRS requires you to make a determination of which you want to claim; and once you have made your choice....YOU HAVE TO STICK TO IT! You cannot change methods year after year. If the standard mileage rate gives you the best deduction one year and the next year you would get a better deduction if you used the actual, then you cannot flip flop. If you chose the standard the first year, you must continue to use it for every year thereafter.

Now many taxpayers want to take the standard mileage rate and depreciate their vehicles. That is not allowed since the IRS has factored in depreciation in it's yearly rate. You can only depreciate your vehicle if you chose to use the actual expense method.

From my experience, 95% of the time, taking the standard mileage rate always gives you the best deduction.

Besides, why would you want to depreciate your vehicle since you have to recapture all that depreciation when you sell it?

2008 Form 2106

Instructions for Form 2106

Standard Mileage Rates

Do You Depreciate?

Generally, you can't deduct in 1 year the entire cost of property you purchased, either for use in your trade or business or to produce income, if the property has a useful life substantially beyond the tax year. Instead, you can depreciate it. You can spread the cost over a number of years and deduct a part of the cost each year.

What to Depreciate

The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles and furniture. You can't claim depreciation on property held for personal purposes. If you use property, such as a car, for both business or investment and personal purposes, only the business or investment use portion may be depreciated. You may depreciate property that meets all 5 of the following tests.

It must be property you own.

It must be used in a business or other income-producing activity.

It must have a determinable useful life.

It must be expected to last more than one year.

It must not be excepted property (certain intangible property, certain term interests and property placed in service and disposed of in the same year). If you're depreciating property you placed in service before 1987, you must use the Accelerated Cost Recovery System (ACRS) or the same method you used in the past. For property placed in service after 1986, you generally must use the Modified Accelerated Cost Recovery System (MACRS).

Section 179

Under Section 179, there are limits on the amount you can deduct in a tax year. You can deduct up to $125,000 of the cost of eligible business property in 2007 (the limit is higher if you placed the property in service in a qualified enterprise zone, qualified renewal community property or GO Zone (certain parts of the area affected by Hurricane Katrina). This deduction is reduced if you purchase more than $500,000 (up to $600,000 in the GO Zone) of eligible property for the year. Real estate and property used mainly in connection with furnishing lodging are not eligible for this deduction. The eligible property must be acquired for business use and acquired by purchase.

Eligible property includes the following:

off-the-shelf software
machinery and equipment
property contained in or attached to a building, other than structural components
gasoline storage tanks and pumps at retail service stations
livestock
The Section 179 deduction can't exceed your taxable income from businesses (including wages) for the year.

Also Read:

Self-employment
Rental Income
Capital Gains and Losses
Form 1099

Upcoming Tax Changes for the 2008 Filing Season

The IRS has published changes in legislation which may affect your taxes this year. And let’s admit the inevitable, in a time of recession and economic hardships for all classes of taxpayers, we could all use some tax breaks for the coming filing season.

Take some time to look through the following changes and see if any of these will affect your tax liability reduction.

Additional Child Tax Credit

The income threshold for the Additional Child Tax Credit has been lowered to $8,500 for tax year 2008 only.

0% Capital Gain

The 5% net long-term capital gain rate drops to 0% for those taxpayers who are in the 10% or 15% tax brackets.

Real Property Tax Deduction

Non-itemizers may claim an additional standard deduction for state and local real property taxes paid. The maximum deduction is $500 ($1,000 MFJ).

Refundable First-time Homebuyer

Credit Taxpayers who purchased a principal residence after April 8, 2008, through June 30, 2009, and who have not owned a principal residence in the previous 3 years may claim a refundable credit for 10% of the purchase price. The maximum credit is $7,500 ($3,750 MFS). Eligibility for the credit phases out for modified AGI between $75,000–$95,000 ($150,000–$170,000 MFJ). Note: The credit must be repaid in 15 equal installments starting in 2010. Repayment is accelerated if the home is sold or no longer used as a principal residence.

Recovery Rebate Credit

The rebate that was paid in 2008 will be reconciled on the 2008 tax return. Taxpayers will receive any additional credit due, but don't need to repay any excess credit received.

Kiddie Tax

Kiddie tax now applies to children who are younger than 18, children who are 18 unless they provide more than half of their own support based on earned income, and children who are 19 to 23 and full-time students — unless they provide more than half of their own support based on earned income.

Depreciation

The maximum Section 179 deduction for tax years starting in 2008 has been increased to $250,000. A phaseout of this amount starts when more than $800,000 of qualifying property is placed in service during the tax year. Additional first-year 50% "bonus" depreciation is the default provision for property placed in service in 2008.