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Automobile & travel expenses

Since I receive reimbursement from the State of Ohio for mileage to Columbus while in session, plus mileage reimbursements for special meetings and other committee assignments, would it not be best to just disregard the reimbursement entirely and assume that it is completely offset by mileage expenses and, therefore, not report anything?
If business mileage records are maintained (see Record-keeping Requirements discussion) and you are fully reimbursed for actual mileage driven at the standard mileage allowance rate, it is not necessary to report anything on your federal income tax return. However, to the extent that you are not taxed on your reimbursements, you may not deduct the related expenses. If you incur business expenses for which you are partially reimbursed, you must report all of your reimbursements and all of your related expenses on Form 2106 (detailed below) in order to be permitted to deduct the non-reimbursed portion of your business expenses.

For example: The 40 cents per mile travel allowance allowed to a member for one round trip per week from the legislator's home to the Capitol would be a reimbursement required to be reported on Form 2106, line 7. If the legislator is using the cash basis of accounting to report income and expenses, then funds received during 2007 should be included on his or her 2007 Form 2106. Furthermore, fourth quarter 2006 reimbursement checks dated and delivered in January 2007, would be reportable in 2007.

How do I report my mileage or automobile expenses on my tax return?
Generally, you compute your deductible automobile expenses by using either a standard rate or by deducting actual expenses including depreciation. If you choose to use the standard rate for 2007 you will have to multiply standard mileage allowance for the applicable time period by your total business miles. If you elect to use actual expenses, you multiply your actual automobile expenses by your business use percentage. The business use percentage is computed by dividing your total business miles by total miles driven during the year (See Part II - Form 2106 included in this booklet). You can also take parking fees and tolls, regardless of the method you choose. All non-reimbursed mileage or automobile expenses are reported on Form 2106 Employee Business Expenses. A sample Form 2106 is included in the back of this booklet.

Business automobile and travel expenses carry forward from Form 2106 to Schedule A as miscellaneous itemized deductions. Miscellaneous itemized deductions are deductible only to the extent they exceed 2% of your adjusted gross income. A sample Schedule A is also included in the back of this booklet.

How do I determine whether the standard mileage allowance or my actual automobile expenses is better for me?
The method yielding the greatest deduction depends on the number of business miles driven. Simply compare the deduction based upon actual automobile expenses, including depreciation to the deduction available using the standard mileage allowance. If I itemize my actual automobile expense for one year, can I use the standard mileage allowance method the following year and vice versa? If you wish to utilize the standard mileage rate, you must choose the standard mileage rate the first year you place your automobile in service. If you do not choose the standard mileage rate the first year, you may not use it for that automobile in subsequent years. If you use the standard mileage rate the first year, you are considered to have made an election not to use the modified accelerated cost recovery system. If you change to the actual cost method in a later year, but before the car is considered fully depreciated, you must use straight-line depreciation. Continual tax reform has complicated the response to this and many other questions regarding depreciation for post-1980 asset acquisitions. Therefore, you are well advised to consult a certified public accountant to have your options more clearly defined for you.

If I elect to use my actual automobile expenses, what specific expenses am I allowed?
Deductible items include the cost of gas, oil, tires, repairs, maintenance, insurance, depreciation, licenses, garage rent, parking fees, and tolls. If you use your car exclusively in your business, you may deduct all of the cost of its operation. If you use your car for both business and personal purposes, you must allocate your expenses between business and personal use.

Two items appear to be missing from the list of deductible automobile expenses: the sales tax I pay on the purchase of my new car and the interest I pay on the loan to finance the purchase. Aren’t these items deductible any more?
Sales tax currently is deductible if the sales tax exceeds the state and local income tax deduction. Usually the state and local income tax deduction provides a larger deduction. If this is the case then the sales tax is included as part of the cost basis of the automobile for purposes of computing depreciation. Interest on a car loan for a car used by an employee is considered to be consumer interest and, as such, is not deductible.

What depreciation methods are available under the current tax law?
Generally, automobiles placed in service after December 31, 1986, and used more than 50% for business are depreciated over five years using a 200% declining balance method, with an automatic switch to straight-line at a point to maximize the deduction. Unless the auto meets the two exceptions below, then the depreciation is subject to the luxury auto limitations. Please consult your CPA for those limitations and other planning opportunities should you be considering purchasing or leasing an automobile.

Certain vehicles that weigh more than 6,000 pounds are not considered passenger automobiles under the tax code. Therefore, these vehicles are not subject to the luxury automobile depreciation limitations. Vehicles in the sport utility category are likely to meet this weight exception. However, SUV’s are limited to a $25,000 maximum expense deduction, assuming the vehicle is utilized 100% for business purposes.

Generally, the automobile is treated as placed in service in the middle of the year. Thus, you get a half-year of depreciation in the initial year the automobile is placed in service and a half-year of depreciation in the year the property is disposed of or retired from service.

If qualified business use in the initial year is 50% or less, depreciation must be computed under the straight-line method using a five-year life. If qualified business use exceeds 50% in the first year but falls to 50% or less in a subsequent year, you must change to the straight-line method of computing depreciation using a five-year life. Also, as noted in the following question, the reduction in business usage may also result in the recognition of income in the form of recapture of depreciation claimed in prior years. The law and regulations regarding depreciation deductions can be extremely complex. Consult your certified public accountant when questions in this area arise.

What is the tax effect of a decrease in business usage on an automobile that I use for both business and personal purposes?
When your business usage declines to 50% or less, you are required to recapture part of the depreciation deductions claimed in prior years.

Other than travel to and from Columbus, what mileage can I count?
You are likely to travel on business a great deal while in your home district or on business trips to other locations outside your district. Deductible travel includes travel to meetings or events where you will speak or which you believe are important to attend because of your political position.

This mileage can become substantial, particularly if your district is large. You may be required to travel several miles from one town to another to attend civic functions, political functions or other meetings related to your legislative duties. Therefore, a memorandum of this mileage should be recorded.

If I use another mode of transportation to get to Columbus, such as a bus or airplane, can I deduct these expenses in addition to my mileage expense?
If you use a bus, airplane or other means of transportation to Columbus, these expenses should be detailed on Form 2106, Part I. You cannot claim both the mileage you would have incurred had you driven an automobile to Columbus and the cost of the bus fare or airplane ticket.

On occasion, I ride with another legislator to Columbus. Do I still claim a tax deduction for the mileage for that particular day, even though I did not drive my own car?
When you ride with someone else and do not directly incur any travel expense yourself, you cannot claim a tax deduction for mileage.

What about mileage expenses incurred during my reelection campaign? Although I am running for reelection, I continue to have a responsibility to meet with constituents to explain my activities and views as a current member of the Ohio General Assembly.
The Internal Revenue Code specifically states that campaign expenses are not tax deductible. (See section on campaign expenses.) Because of this, it is very important for you to distinguish between those expenses that are directly related to a campaign for reelection and those expenses which can be directly attributable to serving your constituency. If there is no specific starting date to your campaign, you might set up a time period about one month before the date of the primary or general election and record, but not claim, any expenses incurred during this time as business expenses.

Consider these expenses as strictly nondeductible campaign expenses. Take the business expenses incurred prior to this one-month period, maintain the necessary records, and claim them as tax-deductible expenses. These expenses must be directly related to the business purpose of fulfilling your obligation as an elected state official.

I stay in a hotel in Columbus during the legislative session and I am required to drive to the Statehouse each day. Can I include this mileage as business mileage?
Yes. Your residence in Columbus is not considered your tax home (permanent residence); therefore, it is considered a deductible commuting expense. You may include the mileage from your Columbus residence to the Statehouse or to any other location as long as the purpose of the travel is directly related to the business of being a member of the Ohio General Assembly.

I have an office in my home district. Can I deduct mileage expense from my home to this office?
No. The mileage from your residence to your local place of business is not deductible. This is considered a nondeductible commuting expense.

I received a traffic ticket because I was rushing to get to the Statehouse for a committee meeting. Is the fine a tax-deductible expense?
No. A traffic fine is a penalty and, therefore, not a deductible expense.

Would leasing an automobile be more advantageous for tax purposes than owning one and depreciating it?
The answer depends on the actual facts and circumstances involved. The amount of expenses allowable remains the same, except that lease payments have replaced depreciation as an eligible expense item. In addition, the IRS has published regulations that adjust the amount of a lease deduction as if it were subject to the same limitations as the depreciation deduction. Keep in mind that leasing an automobile does not relieve the record keeping requirements that must be followed to determine the business use of the automobile and substantiate the deduction.

Does the 2007 standard mileage rate of 48.5 cents per mile cover all automobile expenses?
No. In addition to the standard mileage rate you may also deduct parking fees and tolls.