Monthly Newsletter - FEBRUARY 1996

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The MDTAXES Network

CPAs specializing in Health Care Professionals

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Deducting Automobile Expenses:

Taxpayers planning to claim a deduction for automobile expenses must first understand what qualifies as business miles. Total mileage driven during the year should be allocated between deductible and non-deductible miles based on the following:

DEDUCTIBLE MILES:

• Travel between two different workplaces
  

• Travel between a residence and a temporary workplace at which a person works on an irregular or short-term basis
  
• Travel to and from job interviews, conferences and continuing education seminars that qualify as deductible business expenses

NON-DEDUCTIBLE MILES:

• Travel between a residence and a regular workplace
  

• Travel between a residence and a hospital or emergency room while on call
  
• All other personal miles driven

Taxpayers who own their vehicles can claim a deduction based on either the standard mileage rates or on actual expenses incurred. The standard mileage rate for 1996 is $.31 per mile and for 1997 is $.315 per mile. Additional information about claiming an automobile deduction can be found in the IRS Publication 917.

Leasing vs Buying:

ADVANTAGES OF LEASING:

• A person can afford a better quality car with less of a down payment and smaller monthly payments.
  

• Upon the expiration of the lease, may young health care professionals will have substantially increased their annual compensation and will be in the market for a new automobile anyway.
  
• Leasing provides a larger tax deduction over owning. This is especially true for professionals who use their vehicles predominantly for business purposes.

DISADVANTAGES OF LEASING:

• For people who put a lot of mileage on their cars, there is normally a fee associated with driving in excess of a maximum number of miles each year, typically 12,000 to 15,000 miles.
  

• Calculating the automobile deduction using the standard mileage rates is not allowed for leased vehicles.
  
• The option of driving a car for a few years while there are no payments is not available. Upon the expiration of the lease term, the vehicle either needs to be bought out or returned to the dealer.

How to Claim the Deduction:

Taxpayers who are compensated as employees must claim deductible automobile expenses as an unreimbursed employee business expense. These type expenses are reported on a Form 2106 and are deducted as a miscellaneous itemized deduction on the Schedule A.

Those taxpayers who are compensated as independent contractors will be able to claim the allowable automobile expenses directly against their income earned as an independent contractor. For these taxpayers, automobile expenses should be reported on line 10 of the Schedule C.

Other Deductible Miles:

The use of an automobile in connection with a charitable activity is deductible at a rate of twelve cents per mile ($.14 per mile effective 1/1/98) and should be reported with other charitable contributions as an itemized deduction of the Schedule A. Any mileage incurred with a qualified move is deductible at a rate of ten cents per mile and should be reported on a Form 3903. The use of an automobile for medical related reasons is also deductible at a rate of ten cents per mile and should be reported with all other medical expenses on the Schedule A.

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