Question and Answer

[Pacun]

Question:

Charlie is a sole proprietor in the construction industry. Charlie owns four trucks that are used in his business, with any or all being used simultaneously by employees. Is Charlie eligible to use the standard mileage rate to determine the deduction for two trucks and actual expenses for determining the deduction for the other two trucks?

Answer:

Sounds like a simple question, but I have yet to find an authoritative source that provides a direct yes or no answer. It is the position [of source] that the answer is yes. Providing all of the substantiation requirements of §274 are satisfied, he can use the standard mileage rate to determine the allowable deduction for two vehicles, and use actual expenses to determine the allowable deduction for the other two vehicles.

In determining employee use of a vehicle under the vehicle special use valuation rules, Reg. §1.61-21©(2)(iii) does provide for a vehicle-by-vehicle determination, but this same phrase is not found in regard to using the standard mileage rate.

An individual's ordinary and necessary expenses incurred in the conduct of his or her trade or business is allowed as a deduction under §162. However, to deduct the expense for a vehicle, the substantiation requirements as specified in Reg. §1.274-5, must be satisfied. In lieu of substantiating the actual amount of any expenditure relating to the business use of a passenger automobile, a taxpayer may use a standard mileage rate as established by the IRS. Using this option, the "amount" requirement for substantiation is deemed substantiated by recording the number of miles. The taxpayer still needs to substantiate the other requirements of time, place, and business purpose.

The use of the standard mileage rate for up to four vehicles was released in News Release 2003-121, 10/15/2003 and Rev. Proc. 2003-76. This has been carried over to each subsequent revenue procedure that releases the current year standard mileage allowance rate (Rev. Proc. 2006-49). Included in the revenue procedure is the statement "Use of a method of substantiation described in this revenue procedure is not mandatory and a taxpayer may use actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation."

[jainen]

>>Is Charlie eligible to use the standard mileage rate to determine the deduction for two trucks and actual expenses for determining the deduction for the other two trucks?<<

Answer is yes. He does not have to treat all vehicles the same. If he claims cents-per-mile in the first year of service for a particular vehicle, he can use actual or standard for that vehicle in future years regardless of what he uses for the other three vehicles.

However, if he has five or more vehicles that he uses simultaneously in a single activity, it is considered a fleet and he can only use actual expenses for each of the vehicles, even if he previously used standard in a year he had less than five.

[TAXBILLY]

Let's say on 7/1/2007 he buys that fifth vehicle. Does he convert the two vehicles that he has been using the standard rate at that time to actual use or is it retroactive to the beginning of the calendar year?

taxbilly

[jainen]

>>Does he convert the two vehicles that he has been using the standard rate at that time to actual<<

He can't claim actual expenses and standard mileage for the same vehicle in the same year. If he is required to use actual, he has to use actual.

[TAXBILLY]

So even though he is required to use actual because he added a fifth vehicle on 7/1/2007 he would use actual for the entire year?

taxbilly