The Standard Mileage Rate

If you use the standard mileage rate (SMR) method, you calculate the fixed and operating costs of your vehicle by multiplying the number of business miles traveled during the year by the business standard mileage rate. This rate is set by the IRS and adjusted annually. For 2010, the standard mileage rate for business use of a car was 50 cents a mile. In 2011, it will be 51 cents per mile.

While very simple to use, the SMR is not available to everyone. Specifically, this rate may not be used to compute the deductible expenses for:

• vehicles used for hire, such as taxis
• five or more vehicles owned or leased by a taxpayer and used simultaneously, as in fleet-type operations (this does not include situations where you own more than one vehicle, such as a car and a truck, but you don't use them at the same time; in that case, you can still use the SMR)
• vehicles depreciated using any method other than straight line (e.g., MACRS) or for which you claimed any special depreciation allowance (e.g. bonus depreciation)
• vehicles for which you claimed a section 179 deduction
• vehicles that you lease if you have claimed actual car expenses after 1997
• vehicles used by a rural mail carrier who received a qualified reimbursement

Tip The standard mileage rate can be used for cars that you lease, not just those that you own, provided that you continue to use this method for the entire lease term.

If you want to use the standard mileage rate for a car, you must use it in the very first year you place it in service for your business. If you do that, in later years you can switch between the actual cost method, and the standard mileage rate, depending on which method yields the bigger deduction in any given year. However, once you use the standard mileage rate, you must use the straight-line method of depreciation if you switch to the actual cost method.

Ordinarily, straight-line gives you a smaller deduction than the quicker MACRS method of depreciation. The SMR and MACRS are basically incompatible, and if you've ever used MACRS for a car, you can never use the SMR method for that car.

What's included in the SMR? Using the standard mileage rate takes the place of deducting almost all of the operating and fixed business costs of your vehicle, such as maintenance and repairs, tires, gas, oil, insurance, and license and registration fees. However, you can still deduct parking fees and tolls that are directly related to business (i.e., not commuting) in addition to the SMR. For business owners, interest on loans for vehicles and taxes attributable to the operation of these vehicles are also deductible in addition to the SMR.

When you use the standard mileage rate method, a specific amount is included for depreciation. This means that you can't claim an additional deduction for depreciation when you use the SMR. It also means that if you use the SMR, when you sell your car and need to determine whether you had any taxable gains, you must adjust the basis of your vehicle for each year the method was used.

For each year the standard mileage rate has been used, you must multiply your business mileage for the year by the amount shown in the chart, and then reduce your car's tax basis (and increase your potential taxable gains) by that amount.

Example In 2005, you bought a car for exclusive use in your business. The car cost $22,500. From 2005 through 2010, you used the standard mileage rate to figure your car expense deduction. The miles driven in each year are shown below. The depreciation is figured as follows. Year Miles Driven Adjustment Amount Depreciation 2005 14,100 0.17 $2,397 2006 16,300 0.17 $2,771 2007 15,600 0.19 $2,964 2008 16,700 0.21 $3,507 2009 15,100 0.21 $3,171 2010 14,900 0.23 $3,427 Total $18,237 At the end of 2010, your adjusted basis in the car is $4,263 ($22,500 - $18,237).