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IRS boosts mileage rate, explains hybrid vehicle credit for 2005.

Due to the dramatic increase in gasoline prices, the IRS increased the standard mileage rate, effective Sept. 1, 2005 (IR-2005-99, 9/9/05, amending Rev. Proc. 2004-64, IRB 2004-49, 898). If you use your car for business, you can deduct your actual expenses or rely on an IRS standard mileage rate. Additionally, recent legislation creates a tax credit opportunity for alternative motor vehicles.

Under the actual expense method, you can deduct the cost of gasoline, oil, maintenance and repairs, insurance, vehicle registration fees, and either an allowance for depreciation of a car that is owned or payments for a car that is leased. Relying on the standard mileage rate eliminates the need to keep track of separate expenses. Tolls, parking, interest and taxes can be deducted separately under both methods. However, even when using the standard mileage rate, you must still substantiate the number of miles traveled for business, the date and the purpose of the travel.

Generally you can select the method resulting in the greater deduction--assuming you have records to support the actual expense method. However, the standard mileage rate cannot be used for a vehicle placed in service in a prior year if actual expenses were deducted in that prior year. Also, the rate can't be used for a vehicle for hire (e.g., a taxi) or by a business using more than four vehicles at the same time.

New IRS Standard Mileage Rates

New standard mileage rates are effective for the final four months of 2005; old rates apply for the first eight months of the year. The rates are as follows:

* Business mileage: 40.5 cents per mile through Aug. 31, 2005; 48.5 cents per mile starting Sept. 1, 2005.

* Medical and moving mileage: 15 cents per mile through Aug. 31, 2005; 22 cents per mile starting Sept. 1, 2005.

* Charitable mileage: 14 cents per mile for the entire year. This is a statutory rate that cannot be adjusted by the IRS.

To meet substantiation requirements, employers can use the higher business mileage rate to reimburse employees.

Choose the Better Write-off Method

The higher mileage rate for business driving may not adequately account for your costs. For example, if you drive 1,000 miles per month for business, the higher mileage rate will add only $320 (4,000 miles x 8 cents per mile) to your business deduction for the year. Whether the higher standard mileage rate should be used depends on a number of factors:

* price of gasoline in your area,

* fuel efficiency (how many miles to the gallon your vehicle gets), and

* vehicle cost (affects the deduction for depreciation if you own the vehicle or the payments if you lease it).

Tax Credits for Alternative Motor Vehicles

Starting in 2006, you may be eligible for a tax credit if you purchase an "alternative motor vehicle," including a hybrid, advanced lean-burn, alternative fuel or fuel cell (Code Sec. 30B added by the Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005, P.L. 109-53). The credit applies to vehicles purchased for business or personal purposes. The amount of the credit for the purchase of a car or light truck falling within one of these categories can be up to:

* $3,400 for hybrid and advanced lean-burn vehicles,

* $4,000 for alternative fuel vehicle, and

* $12,000 for fuel cell vehicle.

Once a manufacturer sells 60,000 hybrid or advanced lean-burn vehicles, the credit starts to be phased out starting in the next calendar quarter. The credit is limited to 50 percent of the otherwise allowable credit in the next two calendar quarters, and 25 percent of the otherwise allowable credit in the following two calendar quarters. No credit will be allowed after that; no credit will be allowed one year after the manufacturer reaches the 60,000 vehicle limit.


Hybrid vehicles purchased in 2005 qualify for an above-the-line deduction of $2,000. If you want to acquire a fuel-efficient vehicle and qualify for a tax credit, you must wait until 2006 to place the vehicle in service.

You must be the original purchaser of the vehicles; resales do not qualify for the credit. The vehicle must be made by a manufacturer; individuals who modify engines to use alternative fuel do not qualify for the credit.

The amount of the credit is subject to limitation. For example, if a vehicle is purchased by a business, the credit is part of the general business credit and is subject to the general business credit limitation (see instructions to Form 3800, General Business Credit).

By Sidney Kess, CPA, J.D., LL.M

New standard mileage rates are effective for the final four months of 2005.
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Title Annotation:Client Report; Internal Revenue Service
Author:Kess, Sidney
Publication:The National Public Accountant
Geographic Code:1USA
Date:Oct 1, 2005
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