New Standard Mileage Rates 2010Thursday [3-Dec-2009], IRS has just issued 2010 optional standard mileage rates for calculating the deductible costs of operating an automobile for business, charitable, medical or moving purposes. In general, the rates for business, medical and moving purposes are slightly lower than last year’s rates, reflecting generally lower transportation costs. 50 cents per mile for business, 14 cents per mile for charitable contribution and 16.5 cents per mile for medical and moving. The new standard mileage rates is effective for (1) deductible transportation expenses paid or incurred on or after January 1, 2010, and (2) mileage allowances or reimbursements paid to an employee or to a charitable volunteer (a) on or after January 1, 2010, and (b) for transportation expenses the employee or charitable volunteer pays or incurs on or after January 1, 2010.

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How is the procedure on implementation level? Read on…

 

 

Business Standard Mileage Rate

In general, the standard mileage rate for transportation expenses is 50 cents per mile for all miles of business use.

Use of the business standard mileage rate – A taxpayer may use the business standard mileage rate for an automobile that a taxpayer either owns or leases. A taxpayer generally may deduct an amount equal to either the business standard mileage rate times the number of business miles traveled or the actual costs (both fixed and variable) the taxpayer pays or incurs that are allocable to traveling those business miles.

Business standard mileage rate in lieu of fixed and variable costs – A taxpayer computes a deduction using the business standard mileage rate on a yearly basis and in lieu of computing the fixed and variable costs of the automobile allocable to business purposes. Items such as depreciation or lease payments, maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insurance, and license and registration fees are included in fixed and variable costs for this purpose.

Parking Fees, Tolls, Interest, and Taxes – A taxpayer may deduct, as separate items, parking fees and tolls attributable to use of the automobile for business purposes. A taxpayer also may deduct interest relating to the purchase of the automobile and state and local personal property taxes as separate items to the extent allowable under § 163 or § 164, respectively.

Depreciation – For automobiles a taxpayer owns and has placed in service for business purposes, and for which the taxpayer used the business standard mileage rate for any year, 16 cents per mile is treated as depreciation for 2003 and 2004, 17 cents per mile for 2005 and 2006, 19 cents per mile for 2007, 21 cents per mile for 2008 and 2009, and 23 cents per mile for 2010 for those years in which the taxpayer used business standard mileage rate. If the taxpayer used actual costs for one or more of those years, these rates do not apply to any year in which the taxpayer used actual costs. The depreciation described above reduces the basis of the automobile (but not below zero) in determining adjusted basis as required by § 1016.

 

Limitations:

  • A taxpayer may not use the business standard mileage rate to compute the deductible expenses of (a) automobiles used for hire, such as taxicabs, or (b) five or more automobiles owned or leased by a taxpayer and used simultaneously (such as in fleet operations).
  • A taxpayer may not use the business standard mileage rate to compute the deductible business expenses of an automobile a taxpayer leases unless the taxpayer uses either the business standard mileage rate or a fixed and variable rate allowance (FAVR allowance) (as provided in section 8 of this revenue procedure) to compute the deductible business expenses of the automobile for the lease period.
  • A taxpayer may not use the business standard mileage rate to compute the deductible expenses of an automobile for which the taxpayer has (a) claimed depreciation using a method other than straight-line for its estimated useful life, (b) claimed a § 179 deduction, (c) claimed the additional first-year depreciation allowance under, for example, § 168(k) or § 168(n), or (d) used the Accelerated Cost Recovery System (ACRS) under former § 168 or the Modified Accelerated Cost Recovery System (MACRS) under current § 168. If, after using the business standard mileage rate, the taxpayer uses actual costs, the taxpayer must use straight-line depreciation for the automobile’s remaining estimated useful life.
  • A taxpayer who is an employee of the United States Postal Service may not use the business standard mileage rate and this revenue procedure to compute the amount of the taxpayer’s deductible automobile expenses incurred in performing services involving the collection and delivery of mail on a rural route if the taxpayer receives qualified reimbursements (as defined in § 162(o)) for the expenses. See § 162(o) for the rules that apply to these qualified reimbursements.

 

 
Charitable And Medical And Moving Standard Mileage Rates

Charitable – Section 170(i) provides a standard mileage rate of 14 cents per mile for purposes of computing the charitable contribution deduction for use of an automobile in rendering gratuitous services to a charitable organization under § 170.

Medical and moving – The standard mileage rate is 16.5 cents per mile for use of an automobile (1) to obtain medical care described in § 213, or (2) as part of a move for which the expenses are deductible under § 217.

Charitable or medical and moving standard mileage rates in lieu of variable expenses – A deduction computed using the applicable standard mileage rate for charitable, medical, or moving expense miles is in lieu of all variable expenses (including gasoline and oil) of the automobile allocable to those purposes. Costs for items such as depreciation or lease payments, insurance, and license and registration fees are not deductible, and are not included in the charitable or medical and moving standard mileage rates.

Parking fees, tolls, interest, and taxes – A taxpayer may deduct, as separate items, parking fees and tolls attributable to the use of the automobile for charitable, medical, or moving expense purposes. Interest relating to the purchase of the automobile and state and local personal property taxes are not deductible as charitable, medical, or moving expenses, but they may be deducted as separate items to the extent allowable under § 163 or § 164, respectively.

 

 
Fixed And Variable Rate [FAVR] Allowance

In general;

  • The ordinary and necessary expenses an employee pays or incurs in driving an automobile the employee owns or leases in performing services as an employee of the employer are deemed substantiated (in an amount determined under section 9 of this revenue procedure) when a taxpayer reimburses those expenses using a FAVR allowance. A FAVR allowance is a mileage allowance using a flat rate or stated schedule that combines periodic fixed and variable rate payments that meet all the requirements.
  • A taxpayer must base the amount of a FAVR allowance on data that (a) is derived from the base locality, (b) reflects retail prices paid by consumers, and (c) is reasonable and statistically defensible in approximating the actual expenses employees receiving the allowance would incur as owners of the standard automobile.

 

Computation of FAVR Allowance

FAVR allowance – A FAVR allowance includes periodic fixed payments and periodic variable payments. A taxpayer may maintain more than one FAVR allowance. A FAVR allowance that uses the same taxpayer, standard automobile (or an automobile of the same make and model that is comparably equipped), retention period, and business use percentage is considered one FAVR allowance, even though other features of the allowance may vary. A FAVR allowance also includes any optional high mileage payments. However, optional high mileage payments are included in the employee’s gross income, are reported as wages or other compensation on the employee’s Form W-2, and are subject to withholding and payment of employment taxes when paid. An optional high mileage payment covers the additional depreciation for a standard automobile attributable to business miles driven and substantiated by the employee for a calendar year in excess of the annual business mileage for that year. If an employee is covered by the FAVR allowance for less than the entire calendar year, the annual business mileage may be prorated on a monthly basis for purposes of the preceding sentence.

Periodic fixed payment – A periodic fixed payment covers the projected fixed costs (including depreciation or lease payments, insurance, registration and license fees, and personal property taxes) of driving the standard automobile in performing services as an employee of the employer in a base locality, and must be paid at least quarterly. A taxpayer may compute a periodic fixed payment by (a) dividing the total projected fixed costs of the standard automobile for all years of the retention period, determined at the beginning of the retention period, by the number of periodic fixed payments in the retention period, and (b) multiplying the resulting amount by the business use percentage.

Periodic variable payment – A periodic variable payment covers the projected variable costs (including gasoline and all taxes thereon, oil, tires, and routine maintenance and repairs) of driving a standard automobile in performing services as an employee of the employer in a base locality, and must be paid at least quarterly. A taxpayer may compute a periodic variable payment rate for a computation period by dividing the total projected variable costs for the standard automobile for the computation period, determined at the beginning of the computation period, by the computation period mileage. A computation period may be any period of a year or less. Computation period mileage is the total mileage (business and personal) a taxpayer reasonably projects a standard automobile will be driven during a computation period and equals the retention mileage divided by the number of computation periods in the retention period. For each business mile an employee substantiates for the computation period, a taxpayer must make a periodic variable payment at a rate that does not exceed the rate for that computation period.

Base locality – A base locality is the particular geographic locality or region of the United States in which an employee generally pays or incurs the costs of driving an automobile in performing services as an employee of the employer. Thus, for purposes of determining the amount of fixed costs, the base locality is generally the geographic locality or region in which the employee resides. For purposes of determining the amount of variable costs, the base locality is generally the geographic locality or region in which the employee drives the automobile in performing services as an employee of the employer.

Standard automobile – A standard automobile is the automobile a taxpayer selects on which a specific FAVR allowance is based.

Standard automobile cost – The standard automobile cost for a calendar year may not exceed 95 percent of the sum of (a) the retail dealer invoice cost of the standard automobile in the base locality, and (b) state and local sales or use taxes on the purchase of the automobile. The standard automobile cost may not exceed $27,300.

Annual mileage – Annual mileage is the total mileage (business and personal) a taxpayer reasonably projects an employee will drive a standard automobile during a calendar year. Annual mileage equals the annual business mileage divided by the business use percentage.

Annual business mileage – Annual business mileage is the mileage a taxpayer reasonably projects an employee will drive a standard automobile in performing services as an employee of the employer during the calendar year, but may not be less than 6,250 miles for a calendar year. Annual business mileage equals the annual mileage multiplied by the business use percentage.

Business use percentage – A taxpayer determines the business use percentage by dividing the annual business mileage by the annual mileage. The business use percentage may not exceed 75 percent. In lieu of demonstrating the reasonableness of the business use percentage based on records of total mileage and business mileage driven by employees annually, a taxpayer may use a business use percentage that is less than or equal to the following percentages for a FAVR allowance that is paid for the following annual business mileage:

6,250 or more but less than 10,000 –> 45 percent
10,000 or more but less than 15,000 –> 55 percent
15,000 or more but less than 20,000 –> 65 percent
20,000 or more –> 75 percent

Retention period – A retention period is the period in calendar years a taxpayer selects during which the taxpayer expects an employee to drive a standard automobile in performing services as an employee of the employer before the automobile is replaced. The period may not be less than two calendar years.

Retention mileage – Retention mileage is the annual mileage multiplied by the number of calendar years in the retention period.

Residual value – The residual value of a standard automobile is the projected amount for which it could be sold at the end of the retention period after being driven the retention mileage. The Service will accept the following safe harbor residual values for a standard automobile computed as a percentage of the standard automobile cost:

2 years –> 70 percent
3 years –> 60 percent
4 years –> 50 percent

FAVR Allowance in Lieu of Fixed and Variable Costs

A reimbursement computed using a FAVR allowance is in lieu of the employee’s deduction of all the fixed and variable costs the employee pays or incurs in driving the automobile in performing services as an employee of the employer. Items such as depreciation or lease payments, maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insurance, license and registration fees, and personal property taxes are included in fixed and variable costs for this purpose.

An employee may deduct, as separate items, parking fees and tolls attributable to the employee driving the standard automobile in performing services as an employee of the employer. Similarly, an employee may deduct, as a separate item, interest relating to the purchase of the standard automobile to the extent that the interest is an allowable deduction under § 163.

 

Depreciation

A taxpayer may not provide a FAVR allowance for an automobile for which an employee has (a) claimed depreciation using a method other than straight-line for its estimated useful life, (b) claimed a § 179 deduction, (c) claimed the additional first-year depreciation allowance under, for example, § 168(k) or § 168(n), or (d) used ACRS under former § 168 or MACRS under current § 168. If an employee uses actual costs for an owned automobile that has been covered by a FAVR allowance, the employee must use straight-line depreciation for the automobile’s remaining estimated useful life (subject to the applicable depreciation deduction limitations under § 280F).

The total amount of the depreciation component for the retention period a taxpayer includes in computing the periodic fixed payments for that retention period may not exceed the excess of the standard automobile cost over the residual value of the standard automobile. In addition, the total amount of the depreciation component may not exceed the sum of the annual § 280F limitations on depreciation in effect at the beginning of the retention period that apply to the standard automobile during the retention period.

If the depreciation component of periodic fixed payments exceeds the limitations, the Service will treat that section as satisfied if the total annual amount of the FAVR (periodic fixed and variable) payments a taxpayer makes to an employee driving 80 percent of the annual business mileage of the standard automobile does not exceed the business standard mileage rate for that year multiplied by 80 percent of the annual business mileage of the standard automobile.

The depreciation included in each periodic fixed payment portion of a FAVR allowance paid with respect to an automobile reduces the basis of the automobile (but not below zero) in determining adjusted basis as required by § 1016.

 

FAVR Allowance Limitations

  • A taxpayer may provide a FAVR allowance only to an employee who substantiates to the taxpayer for a calendar year at least 5,000 miles driven in performing services as an employee of the employer or, if greater, 80 percent of the annual business mileage of that FAVR allowance. If the employee is covered by the FAVR allowance for less than the entire calendar year, the taxpayer may prorate these limits on a monthly basis.
  • A taxpayer may not provide a FAVR allowance to a control employee (as defined in § 1.61-21(f)(5) and (6), excluding the $100,000 limitation in paragraph (f)(5)(iii)).
  • A taxpayer may not provide a FAVR allowance if at any time during a calendar year a majority of the employees the FAVR allowance covers are management employees.
  • A taxpayer may not provide a FAVR allowance to any employee unless at all times during a calendar year FAVR allowances provided by the taxpayer cover at least five employees in total.
  • A taxpayer may provide a FAVR allowance only for an automobile (a) the employee receiving the payment owns or leases, (b) the cost of which, as a new vehicle (whether or not purchased new by the employee), was at least 90 percent of the standard automobile cost included in determining the FAVR allowance for the first calendar year the employee receives the allowance for that automobile, and (c) for which the model year does not differ from the current calendar year by more than the number of years in the retention period.
  • A taxpayer may not provide a FAVR allowance for an automobile an employee leases for which the employee has used actual expenses to compute the deductible business expenses of the automobile for any year during the lease period.
  • The insurance cost component of a FAVR allowance must be based on the rates charged in the base locality for insurance coverage on the standard automobile during the current calendar year without considering rate-increasing factors such as poor driving records or young drivers.
  • A taxpayer may provide a FAVR allowance only to an employee whose insurance coverage limits on the automobile for which the FAVR allowance is paid are at least equal to the insurance coverage limits used to compute the periodic fixed payment under that FAVR allowance.