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. The rate, set by the IRS and adjusted annually, is 48.5 cents per mile in 2007, 50.5 cents per mile from January through June 2008, and 58.5 cents per mile from July through December 2008.

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)

Tip As of 1998, 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 (or the remainder of the term, for leases that began before 1998).

For all practical purposes, 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 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.

For example, if a car is used for 7,000 business miles in 2007, the basis would be reduced by $1,330 (7,000 x $0.19).

Pre-1990 use of a vehicle in excess of 15,000 miles in one year is disregarded for the purpose of basis adjustment, even if the actual business mileage was higher.