Thursday, February 24, 2011

What is the best method to expense my vehicle?

Q.  Having read your past posts on taking auto expenses, just when is it better to take mileage versus actual costs? BG, Idaho

A.  Excellent question! The first thing I would want to know is if you're really asking about a car or an RV. So I'll try to address both. Let's talk about actual expenses first. The depreciation tables for a car cover basically 5 years; really 6 years because you are limited to half or quarter year conventions on the first year. Then the actual amounts you can deduct are further limited to maximums set by congress. Then, if the vehicle is used less than 100% of business (which is usually the case), the amount needs to be prorated. With the hassle of keeping all  receipts for the year, many people are dissuaded from using the actual cost method. If the cost of the vehicle isn't covered in the years allocated due to depreciation limitations, you simply start the process all over again.

Now, if you talking about an RV, due to the high cost, it's usually the only way to go, unless of course, your RV costs no more than the typical new car. Typically because of the weight, you are not limited to the tables used by cars, so the depreciation can be very generous.That being said, I prefer to take a more conservative approach with the Table of Class Lives and Recovery Periods. Trucks and buses range from 4 to 9 years.

To use the actual cost method with an RV, you still need to keep all the receipts during the year and, of course, allocate the business portion to total usage.

Many people are keeping their cars and RVs a very long time. If you use the mileage method, there is no limitation as to the length of depreciation, so in the long run, it may be more generous over time. There are other items you can actually add to the mileage: (1) license fees, and (2) interest paid on the vehicle, if any, (3) parking fees, and (4) tolls. Another benefit is there is no receipt keeping, other than the 4 items listed in the previous sentence.

Remember, in either case, you should keep track of the actual depreciation taken in the cost method, or the implied depreciation using the mileage method for when you sell or otherwise dispose of a vehicle used in business. There are special rules for switching methods and some pitfalls if Section 179 and or accelerated depreciation is taken. Careful consideration should be used prior to deciding which is the best method to use.

PS Since my original comment, depreciation has been disallowed for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.

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