Should I use a standard mileage rate or actual expense method? (old and new car)

[zulaatax]

I received 1099 NEC forms from Uber, Lyft, and Amazon. I used 2 cars, one is an old car that I used until Sept, then a new car until the end of the year. What is the best method for me to use for my old and new car? If I use the standard mileage method, I do believe I can't depreciate my car because it’s already included in the standard mileage rate.     

[DianeW777 · Accepted solution]

It depends.  I would suggest using the standard mileage rate (SMR) for the old car for sure.  The rate for 2023 is 65.5 cents per mile.

Enter two separate vehicles. First the old car and then the new car.

• Review IRS Publication 463 (Chapter 4)

For the new car, it's important to note that if you don't use the SMR the first year you place a car in service, then you can never use it on that car again. 

There is a limit on the total section 179 deduction, special depreciation allowance, and depreciation deduction for cars, trucks, and vans that may reduce or eliminate any benefit from claiming the section 179 deduction. See Depreciation Limits (page 29).  Section 179 is an option if you have high income, but if the income is lower in 2023 you may want to either depreciate the car over 5 years or take the SMR to give yourself options and it's a lot less recordkeeping.  Simply track your business miles each year with an app or a computer file such as excel.

The old car may have some tax consequences if you sold it or traded it for the new car.  If you did not sell or trade the old car there is nothing to do until you do.

• When you use expenses for your car to reduce your income then a sale or trade becomes a tax event to determine gain or loss on the exchange strictly for the business portion.  Total business miles all years divided by total miles on the business vehicle all years give you the business use percentage to use on the sales price or trade-in value. The following information will show you how to handle this in your tax return.  

OLD VEHICLE Actions if sold or traded:

The way to report the sale (trade is not really recognized by the IRS any longer for equipment or vehicles) is as follows. You have all the records so it should provide you the detail to move forward.

1. All business miles for all years and then total miles for all years - divide business miles by total miles to arrive at your overall business use percentage for the life of the vehicle. You will use this percentage times the selling price (or trade-in value) to arrive at the business selling price. Use the same percentage to arrive at your business portion of the cost before depreciation. 
2. You used the standard mileage rate and a portion of that rate represents depreciation. See the chart below to arrive at the depreciation portion for the business miles only.
3. When you go through the vehicle information in your rental be sure to select 'Sold, disposed of, etc....' then do not indicate it was sold.  You must say 'Yes' it was converted to personal use.  This will eliminate any sales information in the vehicle it self.
4. Once you have completed the information in that section you will follow the steps below to enter your sale:
   1. Go to Less Common Business Situations
   2. Scroll to Sale of  Business Property
   3. On the next screen select Any Other Property Sale
   4. Use the information from step one and the depreciation from step 2 to complete your sale
5. If the personal portion of your vehicle is a loss there is nothing to report for that portion of the sale/trade. 

                                          

[zulaatax]

Thank you very much for your detailed information. Yes, for my old car, I'll use the SMR which is a greater deduction. I sold my old car. 

For my new car, if I use the actual method, then I'm locked into this method for the rest of my vehicle's life. If I use the SMR for my new car, I don't have a big mileage, also I'm unable to deduct vehicle depreciation (section 179 deduction or/and special depreciation allowance), so I  think I can use only the SMR for both cars. 

[Vanessa A]

If you use the SMR for your new car, then you can take straightline depreciation next year on the car if you find out your actual expenses next year are more than your mileage.  This usually only happens when you have to do something major to your vehicle. Even then, if you put $1,000 in tires on it and you drive only 25% for business, you can only deduct $250, not the full $1,000.

Also, remember, if you use the section 179 for your new car and then get rid of it, any "unearned" depreciation will have to be recaptured and added back to your income in the year you sell the car.  

So, the choice is yours, but if you want to be sure you have options for the future, then it is best to use SMR for your new vehicle in the first year. 

Deducting Auto Expenses

[zulaatax]

Do I have to depreciate my car every year when I use my car for business purposes? To avoid having the risk of depreciation recapture tax and added back income in the future when I sell it, can I skip claiming depreciation every year? 

[PatriciaV]

Technically, you are not required to claim depreciation. But you are required to "recapture" depreciation allowed or allowable when you sell the vehicle in the future. That is, you will pay tax on the depreciation, when you sell, whether or not you actually claim it while you were using it for business. 

The Standard Mileage Deduction includes a depreciation equivalent based on the number of business miles. If you claim Actual Expenses, you have some control over how the vehicle is depreciated. 

Section 179 allows you to expense the entire purchase price (some limits apply) but does have a recapture rule if you sell the vehicle before it's fully depreciated or if business use drops below 50%. 

Special Bonus Depreciation allows you to expense up to 80% of the vehicle value in the first year you use it more than 50% for your business. Special Depreciation is treated like regular depreciation if/when you sell the vehicle (taxed as ordinary income).

@zulaatax 

[zulaatax]

Thank you very much again. I bought a new car in 2023 and used it for 75% of my business. I'm sorry I'm confused. In my understanding, there are 3 different kinds of depreciation for a vehicle including regular depreciation, Section 179 deduction, and Special bonus depreciation, am I correct?  I think If I use the SMR, I'm unable to depreciate my new car and can't use Section 179 deduction or/and Special bonus depreciation. 

To lower this year's tax liability, I am thinking of using one of the depreciation for my new car, the regular depreciation, vs Section 179, or Special bonus depreciation, but I'm not sure which is the best.  Can I use 2 depreciation methods (Section 179 and bonus depreciation) in the same year? Will I pay tax on the depreciation of whatever depreciation method I used when I sell my car or my business use drop below 50%? 

[PatriciaV]

You can choose to take Section 179 for some or all of the purchase price (depending on the limits), then claim Special Depreciation for the balance (up to 80%). After that, regular depreciation would apply.