Switching from Actual Expenses to Standard Mileage

[mhs1826]

Client used standard mileage the 1st year and actual expenses for the next several years.
Now that the vehicle is fully depreciated, can i switch back to standard mileage to take advantage of the built in depreciation?

[abctax55]

What depreciation method has been used?

[judys3]

A new vehicle would have to be purchased to switch back to mileage.

[Terry53029]

Generally, the Modified Accelerated Cost Recovery System (MACRS) is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct. For additional information on the depreciation limits, please refer to Topic no. 704. Publication 463 explains the depreciation limits and discusses special rules applicable to leased cars.

If you have fully depreciated the car you can only use expenses, but no further depreciation 

[TaxGuyBill]

Yes, you can switch back to the Standard Mileage Rate.  I am positive.

As a side note, I almost guarantee that the depreciation for Actual Expenses was done incorrectly.  I'm not aware of ANYBODY (including me) that does it correctly.  🤣

[Terry53029]

@TaxGuyBill are you positive you can switch to standard mileage if auto is fully deprecated. do you have a cite for that. Thanks 

[George4Tacks]

https://www.irs.gov/taxtopics/tc510

To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.

I hope someone can track down IRC to go with this.

[TaxGuyBill]

---

@Terry53029 wrote:

@TaxGuyBill are you positive you can switch to standard mileage if auto is fully deprecated. do you have a cite for that. Thanks 

---

Yes, I am positive.

Revenue Procedure 2010-54 says a taxpayer can use the Standard Mileage Rate to use operate a vehicle in their business.  By default, that initially says it can be used anytime.

It then lists some "limitations" when it can NOT be used.  Using it after an auto is fully depreciated is not in the list of "limitations".

[TaxGuyBill]

---

@George4Tacks wrote:

I hope someone can track down IRC to go with this.

---

I did some massive research on this several years ago.

The reason my side-comment said almost everybody depreciates Actual Expenses wrong (after using the Standard Mileage Rate) is because using the Standard Mileage Rate is an election out of MACRS (§168(f)).  That means it is depreciated via Section 167, which means using the "Useful Life" (probably 3 years, rather than the 5 year "Recovery Period" of MACRS).  And because it is being depreciated under §167, it presumably should also have Salvage Value.

But I don't do that either.  🤣

[Terry53029]

@TaxGuyBill in pub 463 (not necessarily a great source) it list the exceptions for taking the standard mileage as follows:

Standard mileage rate not allowed.

You can’t use the standard mileage rate if you:

• Use five or more cars at the same time (such as in fleet operations);

• Claimed a depreciation deduction for the car using any method other than straight line for the car’s estimated useful life;

• Used the Modified Accelerated Cost Recovery System (MACRS) (as discussed later under Depreciation Deduction);

• Claimed a section 179 deduction (discussed later) on the car;

• Claimed the special depreciation allowance on the car; or

• Claimed actual car expenses after 1997 for a car you leased.If expenses were used at anytime you would have used MACRS, therefore you can not use the standard mileage anytime after that.

Bill, not trying to give you a hard time, just trying to nail down the correct way to expense an auto. I've always known that by taking standard mileage the first year you can switch to expense any year after taking standard, but did not think you could switch back after all deprecation taken (wouldn't that be double dipping)

[TaxGuyBill]

As I mentioned to George, after you elect the Standard Mileage Rate, you are not depreciating using MACRS (§168; see §168(f)(1) and the prior Revenue Procedure that I mentioned).

Although this is specifically referring to continuing to use the Standard (rather than Actual to Standard), there was a change or ruling a ways back that allows you to continue to use the full amount of the Standard Mileage Rate after it is fully depreciated.  Publication 463 says:

"If your basis is reduced to zero (but not below zero) through the use of the standard mileage rate, and you continue to use your car for business, no adjustment (reduction) to the standard mileage rate is necessary. Use the full standard mileage rate".

That specifically allows to you use the Standard (which includes built-in depreciation) after the vehicle is fully depreciated.

https://www.irs.gov/publications/p463#en_US_2023_publink100034059

[Terry53029]

It is still confusing, If a TP used the standard mileage the first year, then switched to actual expense the next year (taking MACR's) he would not be allowed to switch back to standard according to pub 463. It says You can’t use the standard mileage rate if you: One of the reasons is taking MACRS, and if a TP used expenses he would most likely use MACRS to deprecate.

[TaxGuyBill]

---

@Terry53029 wrote:

then switched to actual expense the next year (taking MACR's)

---

It would NOT be MACRS.

Using the Standard Mileage Rate permanently takes the vehicle OUT of MACRS, so the taxpayer would be using non-MACRS depreciation under Section 167 (which should be over the "Useful Life" and with "Salvage Value").

[Terry53029]

@TaxGuyBill thanks for spending the time to go over this subject, as I haven't read up on it in years. Think I have a good understanding of the current rules now. Thanks again Bill

[mhs1826]

Thanks for your responses and I agree with you (TaxGuyBill)

As an FYI the Bradford Tax Institute has an article discussing how to take the SL depreciation after switching to Actual Expenses

https://bradfordtaxinstitute.com/Content/How-to-Switch-from-the-Mileage-Rate-to-the-Actual-Expense-M... 

[TaxGuyBill]

@Terry53029   My pleasure.  It has been a while since I've looked at it so it was nice to review things again.  And it is a very confusing subject that is usually misunderstood.

@mhs1826  Wow, that you for that link (I couldn't see all of the Bradford without logging in, but I Googled some of it and I found other websites that copied Bradford; see copy-cat link below).  I haven't seen anything that outlined that rules that well, so it is great to see that Bradford has that.

https://emeraldfinancialpartners.com/switch-from-the-milage-rate-to-the-actual-expense-method/