The IRS has recently announced that the mileage rate for automobiles has been increased from 51 cents per mile to 55.5 cents per mile for the six months that began July 1, 2011, and ends December 31, 2011. This rule applies to those taxpayers who use the business mileage allowance instead of the actual costs of operating a business auto. These costs include depreciation, gasoline, insurance and all repairs and maintenance. The only allowed additional costs to mileage are tolls and parking. The increase seems reasonable. Assuming that gas has increased in price about 60 cents per gallon, if an auto gets 20 miles to the gallon, the increase in cost is 3 cents per gallon. This may then offset some of the loss already incurred in the first half of the year.
Before we leave automobile depreciation, we should consider the effect of the increased write offs permitted by the 2010 Tax Relief Act. A “regular” new automobile purchased in 2011 may be depreciated using the following schedule: $11,060 in the first year, $4,900 in the second year, and $2,950 in the third year, a total of $18,910. Thereafter, the depreciation is limited to $1,775 annually. But Congress lost their heads when considering depreciation of vans and SUVs weighing more than 6,000 lbs. These elude the limited depreciation rules for regular cars. They formerly had their own (increased) limits. But Congress didn’t make any special limitations for them under the 2010 law. A vehicle weighing more than 6,000 pounds purchased in 2011 can be 100% depreciated in 2011!
Reimbursement Plans
The IRS has recently renewed its interest in reimbursement plans. Companies reimburse their employees for expenses they incur, and perhaps the largest reimbursement is for the use of autos. There are all sorts of reimbursement plans out there, and the IRS is willing to remind people of the right way and the wrong way. The way the IRS thinks is most wrong is a simple fixed amount to cover the use of an auto — “We’ll give you $2,500 tax free for use of your auto which will be added to your paycheck.” The IRS likes to think of this as additional salary on which taxes have not been paid; the IRS will be happy to bill the employer for payroll taxes plus stiff penalties. The employee will be required to pay income tax on the allowance.
The employee can avoid the problem by recording auto expenses (including depreciation) on the personal tax return as a miscellaneous itemized deduction, and subtracting the reimbursement. Any excess is taxable income and reverts to additional salary on page one of his/her form 1040 subject to self-employment taxes. The problem for the employee is that he/she loses 2% of gross income as a reduction of miscellaneous expenses. And if the employee ends up in Alternative Minimum Tax, the entire deduction is lost.
Thus the flat reimbursement without an accounting from the employee is the worst way to go, and yet many firms are doing it; the IRS has not paid much attention to this in recent years, but apparently they may again be ready to attack. Some firms reimburse their employee on an itemized expense basis. If the employee computes his depreciation under the IRS guidelines and includes the business portion of insurance and is reimbursed monthly, this should satisfy the harshest critic (the IRS). Also, a monthly amount can be paid to the employee as long as a settlement is made by the end of the year; he/she submits the actual yearly expenses, and the employer either pays the employee the difference, or if the employee has been overpaid, the difference is added to his or her W-2.
