The standard mileage rate (SMR), also known as mileage per diem, is the amount per mile that the Internal Revenue Service (IRS) allows small businesses and self-employed persons to use to calculate their vehicle expenses for tax deduction purposes. Businesses that choose to use the standard mileage rate do so because it is easier to use than the actual costs method, which requires keeping complete records of expenses like gasoline, maintenance, tires, insurance, and license and registration fees. The standard mileage rate for business can be used for all mileage accumulated for work-related trips. Normal commuting between home and work does not qualify for this type of deduction.
The standard mileage rate is determined by the IRS and is routinely adjusted, but not more often than once a year. As of January 1, 2006 the standard mileage rate was set to 44.5 cents per mile for the year. In the late summer of 2005 the IRS did make a rare midyear adjustment to the standard mileage rate in an attempt to deal with the unusual circumstances resulting from a summer of devastating hurricanes and the loss of oil refining capacity in the Gulf of Mexico. The IRS explained the one time adjustment this way: “In September, the IRS made a special one-time adjustment for the last four months of 2005, raising the rate for business miles to 48.5 cents per mile in response to a sharp increase in gas prices, which topped $3 a gallon.” The 2006 rate was lowered following stabilization in gas prices but still represents the highest annual rate ever set by the IRS.
A different rate is set by the service for miles driven “for medical or moving purposes” and those driven “in service of charitable organizations.” The 2006 standard mileage rates per mile driven for these two categories were 18 cents and 14 cents respectively.
The standard mileage rate can be used for vehicles that a business owns. In addition, the IRS decided in 1998 that the SMR can also be used for leased vehicles, provided that one uses the standard mileage rate for the duration of the lease (or the balance of the lease if it began before 1998).
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Restrictions Associated With The Standard Mileage Rate
While the standard mileage rate is quite practical, it may not be used in several situations. One instance would include taxis and other vehicles for hire that charge for mileage in the first place. Also, if a fleet-type business is using more than one vehicle at the same time, they cannot use the standard mileage rate, although they can use it if they own two or more vehicles that aren’t being used concurrently. Rural mail carriers that already receive a qualified reimbursement are also not eligible for the standard mileage rate.
In addition, small businesses that decide to use the standard mileage rate for a vehicle must do so in the first year that the vehicle is placed into service. In later years, a business can switch to the actual cost method if they so desire. However, a straight-line method of depreciation, which yields a smaller deduction, must be used in all subsequent years for vehicles that initially used the standard mileage rate.
The standard mileage rate already has vehicle depreciation built into it, meaning that one cannot claim additional depreciation when using this form of deduction. Also, businesses that sell a car that has used the standard mileage rate will have to figure out whether any taxable gains were made on the sale and adjust the tax basis of the vehicle for each year the SMR was applied.
Finally, the standard mileage rate and the ‘actual costs’ method cannot be used at the same time.
See also: Business Travel