Current Focus

Getting Things Right - part two

….continued from May 31, 2011

THE PROBLEM OF EXTREME COMPLEXITY
Medicine has become the art of managing extreme complexity – and a test of whether such complexity can, in fact, be humanly mastered.   In ICU the average patient requires 178 individual actions per day.  Remarkably, nurses and doctors were observed to make an error in just 1 percent of these actions.  That still amounted to an average of two errors a day with every patient.  The reality of intensive care: at any point, we are as apt to harm as we are to heal.  Line infections are so common they are considered a routine complication.  Infections occur in eighty thousand people per year and are fatal between 5 and 28 percent of the time.  There is complexity upon complexity.  And even specialization has begun to seem inadequate.  What do you do when expertise is not enough?  What do you do when even the super-specialists fail?

THE CHECKLIST
In 1935 the U.S. Army Air Corps decided flying a new complex airplane was too complicated to be left to the memory of any one person, however the expert.  They created a pilots checklist. 

In a complex environment, experts are up against two main difficulties. 
1.  The fallibility of human memory and attention.  Especially in all-or-none processes – where if you miss just one key thing, you might as well not have made the effort at all. 
2.  People can lull themselves into skipping steps even when they remember them.  “This has never been a problem before,” people say.  Until one day it is.

Checklists help with memory recall and clearly set out the minimum necessary steps in a process.

A challenge is can you get your head far enough above the daily tide of disasters to worry about the minutiae on some checklist.  In the medical world it was typically the nurses (with clipboard in hand) who kept things in order.

To roll out checklists a project manager should be used.  The PM participated in twice-monthly conference calls with the checklist designer for troubleshooting.  A senior executive was assigned to each implementing unit for at least once a month visits to hear the staff’s complaints and help them solve problems.

Success many times requires having an array of people and equipment at the ready.  In a case described on page 45, almost routinely someone or something was missing.  They tried the usual approach to remedy this – yelling at everyone to get their act together.  But still they had no saves.  They decided to try something new.  They made a checklist.  They gave the checklist to the people who had the least power in the whole process (observation: but people who were involved early in the process)- the rescue squads and the hospital telephone operator.  In a car accident situation with a victim in cold water the checklist said for the rescue teams were to tell the hospital to prepare for possible cardiac bypass and re-warming.  They were to call, when possible, even before they arrived on the scene, as the preparation time could be significant.  The telephone operator would then work down a list of people to notify them to have everything set up and standing by.  With the checklist in place, the team had its first success – the rescue and successful treatment of a three-year-old girl from an icy river.  This was the first of their many subsequent successes.

…. To be continued

Small Business Retirement Plans

There are several retirement plan options for small business owners.   Each plan has its own set of rules and choosing the right plan involves analyzing your particular goals and matching it with the best plan.

The most popular plans are the SEPs, SIMPLE IRAs and the Solo (One-Person) 401(k).  There are other plans that are more complex such as the defined benefit and profit-sharing plans that can be used but, for this discussion we will leave them out.

SEP- Is a simplified employee pension plan that is easy to set up and maintain and generally available to any business.  This plan allows the participant to choose how funds are invested as opposed to a plan administrator.  There are no annual reporting requirements and does not require recurring contributions.  Employee contributions are not allowed and since contributions are at the employer’s discretion then this does not put a burden on the small business when cash is running low or needed for operations.  The maximum employer contribution to an employee account is the lesser of $49,000 or 25% of compensation (up to $245,000 for 2011).  For self-employed individuals, this is limited to 20% of net self-employment income after SE tax deduction.

SIMPLE IRA- This plan is available to employers with 100 or fewer employees earning at least $5,000 in the previous year.  Employee contributions are allowed up to the lesser of 100% of compensation or $11,500 ($14,000, if age 50 or older at year-end).  There is an annual contribution required by the employer and it must either make matching contributions or non-elective contributions.  The matching contribution is up to 3% of compensation or the non-elective contribution equal to 2% of compensation (up to $245,000).

SOLO (One-Person) 401K- Available to any sole proprietorship or business employing only the owner (and spouse). Employee contributions are allowed up to the lesser of 100% of compensation or $16,500 ($22,000, if age 50 or older at year-end).  Employer contributions are discretionary and the maximum is the lesser of $49,000 or 25% of compensation (up to $245,000).  For self-employed individuals, this is limited to 20% of net self-employment income after SE tax deduction.  This plan unlike the other 2 may include designated Roth accounts to which employees can elect to make after-tax contributions.  These contributions still count toward the total allowable contributions.

The information presented above is meant to be general in nature and does not cover all aspects of the Retirement Plans.  We would be glad to assist you in determining the most advantageous plan for your business.

FUTA SET TO CHANGE ON JULY 1ST 2011

The FUTA (Federal Unemployment Tax) rate is slated to change from 0.8% to 0.6%. This is a reduction in a surcharge rate that has been in place since 1983.  This tax change has no bearing on the employee withholding portion of payroll processing.

The wage cutoff will remain the same, at $7,000.00 per employee. The amount of tax per covered employee will drop from $56.00, to $42.00, per year.
The annual FUTA report that is filed at  year end is currently being revised to reflect the two (2) different rates for calendar year 2011.

Hobby Activities

It sounds ideal….Turning your hobby into a business. If you can pull it off, it can be a great thing. I’m tempted sometimes to become a fly fishing guide and leave public accounting behind. The reality is, however, that most people cannot earn enough income to replace their jobs and end up with a venture that is something more than a pastime, but less than a business. Let’s use my fly fishing as an example throughout this article to illustrate this point.

First, we need to define a hobby activity. Section 183(c) of the Internal Revenue Code uses the term “activity not engaged in for profit” for in reference to hobbies and states, “For purposes of this section, the term ”activity not engaged in for profit” means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 [trade or business] or under paragraph (1) or (2) of section 212 [investment].” It’s an activity that has some level of recreation or enjoyment attached. Certainly, fly fishing meets that standard.

The focus of the Internal Revenue Code with respect to hobbies revolves around the deductibility of expenses for that activity. More specifically, whether the activity can create a deductible loss.

An activity is presumed to be a business — and thus not a hobby — if it earns a profit in three out of the previous five years. So, I would need to collect more for my guiding services than I spend on fishing for three years to meet this standard. This can be a tough thing to do particularly if the venture is just starting up. I’ll need to advertise and aggressively network for several years before I have enough paying customers to make a profit taking folks fishing. There are some complex rules governing the standard for ventures that have not existed for less than five years and have not made a profit in three of those years. We’ll skip those rules for this discussion (also, horse related activities have some looser standards). In the next paragraph, you’ll see that they probably won’t come into play anyway.

So, let’s say that I failed to make a profit for three of the past five years. I’ve advertised, introduced myself to the staff at all the local fly shops, and done everything that I can do to get more business. I’ve controlled my expenses as best I could. I’ve just not found enough paying customers to cover my expenses. In this situation, the presumption is that my venture is a hobby. The presumption is rebuttable, but I would bear the burden of proof to show that I have acted in a manner consistent with a business owner and not as just a guy who enjoys flyfishing and occasionally takes paying customers out.

The regulations attached to Section 183 outline several tests to determine if I’ve acted in a manner consistent with a profit motive, and thus have a business or a hobby. No one test is conclusive alone, and should be taken n light of all the facts and circumstances of each case. The tests are as follows:

  • The manner in which the taxpayer carries on the activity. Did I act as a prudent business person would and not as a recreational fly fisherman?
  • The taxpayer’s or the taxpayer’s advisors’ expertise. Would there be any reason to believe me capable of turning a profit as a fly fishing guide?
  • The time and effort spent on the activity. If I’m only doing this for a few hours a month, it’s probably just a hobby. Of course, stalking trout in the North Georgia mountains is an activity that eats up a lot of both time and effort.
  • The expectation assets used may appreciate in value. This standard really exists to define an investment activity rather than a hobby and doesn’t really come into play with this illustration.
  • The taxpayer’s success in other ventures — similar and dissimilar. If I had experience doing the same thing before, that would be a good thing. Also, my experience running a successful public accounting firm does show that I’m capable of running a business.
  • The taxpayer’s history of income or loss with respect to the venture. Obviously, this wouldn’t apply as much to start-ups. But, if I had been guiding for a decade and loosing money every year, that sounds like a hobby.
  • The financial status of the taxpayer. Do I need to earn money guiding?
  • Elements of personal pleasure or recreation. I think it’s worth noting that this test is last, although it’s probably the first thing you would think of. The fact that I might enjoy fishing is only one indicator — and certainly not conclusive by itself. Just because you enjoy doing something does not mean that it can’t be a business.

If I can prevail in proving that I’ve met the standard and acted with a profit motive, I can deduct expenses in excess of my income from guiding. If I can’t, my expenses would be limited to my guiding income — breaking even. That might not be a terrible outcome. It might — depending on the circumstances — reflect the actual split between the business aspect of the activity and the recreational aspect.

Of course, this post is not meant to be an exhaustive analysis of the topic, as I’ve tried to simplify it quite a bit. If this is something that you are concerned about, we could help you put a plan in place to be prepared to prove that your activity is a business and not a hobby.

Getting Things Right

Accountants have traditionally used checklists to make sure their work was performed as correctly as possible.  Accounting firms normally use checklists (which we call work programs) to perform most of our accounting, auditing, and tax work.  We rely on these work programs to make sure we perform our work accurately and consistently.

Therefore, upon hearing about a book titled “The Checklist Manifesto” written by best selling Author/Doctor Atul Gawande (endocrine surgeon and professor at Harvard Medical School) I was very interested in what he might have to say on a subject typically considered too dry to discuss in polite company.  It turns out the lowly checklist (with no small amount of whining and complaining) is proving to be very valuable to not only the finance industry but also the medical profession.  And, of course, the checklist has always been vital to the airline industry.

The book is very well written and makes many points that likely should be considered for assimilation into the way each of us does business and performs personal tasks.

Below are select points from the book.  In some cases, there are observations, paraphrases, mash-ups, and other techniques used to bring-out the point.  A full reading of this book is highly recommended.

INTRODUCTION
The nature of human fallibility.  Why do we fail?
1.  Necessary fallibility.  Some things are simply beyond our capacity.  Much of the world and universe is – and will remain – outside our understanding and control.

However there are substantial realms in which control is within our reach.  In such realms there are two reasons that we may nonetheless fail.
2.  Ignorance.  We may err because science has given us only a partial understanding of the world and how it works.
3.  Ineptitude.  In these instances the knowledge exists yet we fail to apply it correctly.  The skyscraper is built wrong and collapses.  The snowstorm whose signs the meteorologist just plain missed.  The stab wound from a type weapon (sword rather than a knife) the doctors forgot to ask about.

The greatest source of our greatest difficulties and stresses in medicine is not money, or government, or the threat of malpractice lawsuits, or insurance company hassles.  It is the complexity that science has dropped upon us and the enormous strains we are encountering in making good on its promise.

If the knowledge of the best thing to do in a given situation does not exist we are happy to have people simply make their best effort.  But if the knowledge exists and is not applied correctly, it is difficult not to be infuriated.
For those who do the work, however – for those who care for the patients, practice the law, respond when need calls – the judgment feels like it ignores how extremely difficult the job is.  Every day there is more and more to manage and get right and learn.  We have accumulated stupendous know-how.  We have put it in the hands of some of the most highly trained, highly skilled, ..experienced, and hard working people in our society.
Yet that know-how is often unmanageable.  Avoidable failures are common and persistent, not to mention demoralizing and frustrating, across many fields – from medicine to finance, business to government.  And the reason is increasingly evident:  the volume and complexity of what we know has exceeded our individual ability to deliver its benefits correctly, safely, or reliably.

We need a different strategy for overcoming failure.  One that builds on experience and takes advantage of the knowledge people have but somehow also makes up for our inevitable human inadequacies.  There is such a strategy – though it will seem ridiculous, maybe even crazy to those who have spent years carefully developing ever more advanced skills and technologies.  It is a checklist.

. . . To be continued

Personal Energy Property

Taxpayers can claim a credit for certain home improvements placed in service in 2010.  The property must be installed on or in your personal residence that is located in the United States.  Include any labor costs properly allocable to the onsite preparation, assembly, or original installation of the energy property for most products listed.  The improvement must be new property and does not qualify for new construction, vacation and rental homes. Qualified residential energy property is any of the following:

  • Certain electric heat pump water heaters; electric heat pumps; central air conditioners; natural gas, propane, or oil water heaters; and stoves that use biomass fuel (anything that can either burn or decompose).
  • Qualified natural gas, propane, or oil furnaces and qualified natural gas, propane, or oil hot water boilers.
  • Certain advanced main air circulating fans used in natural gas, propane, or oil furnaces.
  • Insulation, storm windows & doors, windows and skylights, metal and asphalt roofs

Qualifying property must meet technical requirements related to energy savings.  Taxpayers are not required to determine whether these requirements are met.  Instead, a manufacturer’s certification statement (that the property meets the technical requirements) generally is required to claim the credit.

The credit is equal to 30% of the cost of qualified energy-efficiency property or improvements. The total amount of credit that can be claimed in 2009 and 2010 combined is $1,500.  There are no taxpayer income limits, so all individuals can claim the credit.  For 2010, the credit can offset regular tax and the alternative minimum tax.

The credit has been extended for property placed in service in 2011 but, has been significantly reduced to a maximum of $500.  The credit allowed can be reduced further based upon any credits that were taken from 2006 through 2010.  The credit for windows in 2011 is limited to $200 and also is reduced by any window credits that had been taken from 2006 through 2010.

This credit has been in place since 2006, but not in 2008.  The law for 2011 may or may not change and I suspect that Congress will keep this credit around for the future.  As you can see for tax years 2009 and 2010 the credit was significant and I suspect that is one reason Congress lowered the maximum credit for 2011.  The next time you are in the market for products that qualify for the credits not only can you save on your taxes but also on your utility bills.

The information presented above is meant to be general in nature and does not cover all aspects of the Residential Energy Tax Credits.  We would be glad to assist you in determining if your particular situation meets the criteria as defined by the IRS.

What should you do if you do not receive form W-2 or if the one you received is incorrect?

First
Contact your employer as soon as possible and request that the problem be corrected.  Give the employer time to correct the problem. 
If after a reasonable amount of time the employer does not correct the problem and you end up contacting them multiple times, on your last contact you should be sure to mention that if the employer does not correct the problem in the next _____ (insert deadline of your choice – two weeks etc.) you will have no choice but to contact the IRS.

Second
If your employer does not correct the problem, contact the IRS at (800) 829-1040 (or visit an IRS office) and report the problem. 
You should not make a reporting before February 15. 

When you contact the IRS, be prepared to provide the following information: your name, address, telephone number and social security number, your employer’s name, address, telephone number, employer identification number, an estimate of the wages you earned, the federal income tax withheld, and the period you worked for that employer. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

An IRS representative will likely initiate a Form W-2 complaint (form 4598) to the person or organization that has failed to send you a form and send a copy of the complaint to you.  The IRS will send a letter to the employer requesting that they furnish a corrected Form W-2 to you within ten days. The letter advises the employer of their responsibilities to provide a correct Form W-2 and of the penalties for failure to do so.

Form 4598 is a two-part form.  Part 1 is sent to the employer or payer requesting issuance of Form W-2. 
Part 2 is sent to the employee or payee to show the action the IRS is taking to help obtain this information.

You will be sent a letter that provides instructions and Form 4852, Substitute for Form W-2, Wage and Tax Statement. 
The Form 4852 may be used in the event that the employer does not provide you with the corrected Form W-2 in time to file your tax return.

Third
If the situation is not corrected as the tax filing deadline approaches, you can still file your return using the estimated amounts with Form 4852 attached to the return.  The purpose of form 4852 is to serve as a substitute for form W-2 and is completed by taxpayers or their representatives.

If you file your return and attach Form 4852 to support the withholding amount claimed instead of a Form W-2, your refund can be delayed while the information you gave the IRS is verified.

If you receive a Form W-2 after you file your return and it does not agree with the income or withheld tax you reported on your return, file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.

Fourth
If you would like assistance please contact us.  We will ask you to provide us with a power of attorney (form 2848) and we can then work with you as you go through this process with the IRS.

Home Office

There are many misconceptions about the use of a home office.  We have heard many times from clients that they have heard that a home office increases their chances of being audited and do not want to take the deduction even when they qualify.

Listed below is information obtained from the IRS website and abbreviated for this discussion.  The benefits of a home office is that expenses for the house that would normally be personal in nature and therefore non deductible become deductible. There is a threshold for these items to exceed and that is 2% of your adjusted gross income. Besides mortgage interest and real estate taxes which are reported as itemized deductions on schedule A, the other allowable expenses are based upon the percentage of the house that is used for business versus total square footage.  The exception to this last statement is that any direct expense for the area used as a home office is 100% allowable.  Below are expenses that are generally deductible for the home office.

  • Mortgage Interest
  • Real estate taxes
  • Home repairs and maintenance
  • Rent
  • Utilities
  • Internet
  • House insurance
  • Security System
  • Depreciation on house
  • Casualty losses

Use test

To qualify to deduct expenses for business use of your home, you must use part of your home:

  1. Exclusively and regularly as the principal place of business (including administrative use)
  2. Exclusively and regularly as a place where you meet or deal with clients or customers in the normal course of your trade or business
  3. In connection with the business if it is a separate structure not attached to the taxpayer’s personal residence.

Employee Use.  In addition to tests 1, 2 or 3 above, the business use of an employee’s home must be for the convenience of the employer.

Employees deduct the business us of home expenses on Form 2106 and Schedule A, these expenses are subject to 2% of AGI.

Regular Use

To qualify under the regular use test, you must use a specific area of your home for business on a regular basis.  Incidental or occasional business use is not regular use.

Exclusive Use

To qualify under the exclusive use test, you must use a specific area of your home only for trade or business.  The area used for business can be a room or other separately identifiable space.  There is no requirement that the business portion of a room be physically separated from the rest of the room by a wall, partition or other demarcation

There are 2 exceptions to this rule:

  1. You use part of your home for the storage of inventory or product samples.
  2. You use part of your home as a daycare facility, which will not be discussed in this post.

The information presented above is meant to be general in nature and does not cover all aspects of the Business Use of Your Home.  We would be glad to assist you in determining if your particular situation meets the criteria as defined by the IRS.

Documenting Business Use of Your Vehicle

Note:  This post expands on the previous one.  If you haven’t already, you might want to read it first.

There are two questions about the business use of your vehicle on your return that emphasize the importance of good documentation:

  1. Do you have evidence to support your deduction?
  2. Is this evidence written?
These two questions show us exactly how an audit of this deduction would start off.  If you cannot produce written documentation, your chances of prevailing in the audit are not good.  If you don’t have it already, assembling convincing documentation of the business use of your vehicle should be on the top of your to do list.  It’s not as difficult as you probably think it’s going to be.

First, the old school method of keeping a paper log is ideal.  Let’s be honest with ourselves.  That’s probably not going to happen.  If you can come up with an easier solution, you will be much more likely to use it every day and to keep it current.  I’m going to discuss several solutions.  You will need to decide for yourself which method is the best for your situation.  Your ideal solution might be a combination of two or more methods.

Contemporaneous methods
  • Mileage log.  This is the best method by far, if kept current.  In addition to the beginning and ending odometer readings, you should also note the business purpose of the trip.  While you probably think of a spiral bound note pad, a mileage log might be electronic, such a spreadsheet on your laptop, smartphone or iPad.
  • Time sheets.  If you already keep a time sheet for billing purposes, it is very easy to simply document business trips in whatever system you currently use.  If you charge your clients for travel already, then you will just need to capture administrative trips such as to the office supply store or to your CPA’s office.  Assembling your log should simply be a matter of pulling the data out of your time and expense tracking system.
  • Smartphone app.  There really is an app for that.  There are plenty of applications on the market for every platform that can produce a mileage log.  Most are designed to produce an expense report, such as you would submit to your employer for reimbursement.  You could use this sort of application to keep track of small cash expenses as well as just your mileage.
  • GPS data.  Many GPS units are capable of logging your trips.  The challenge of this solution will probably be remembering to turn the tracking off during your non-business trips.
After-the-fact methods
  • Appointment book.  If you keep an appointment book already, you can use it to construct a history of where you were during the year.  Then, you can look up the distances to each of your destinations.  This can obviously be very time consuming if you need to do this for a year a time.  This solution will work best for someone who has a relatively small number of destinations, all of which start and end at the same workplace.  If you are in the field all day, stopping at multiple destinations; this will not be an ideal solution.
  • Estimation.  If your schedule is fairly regularly, you may be able to reconstruct your year.  For example, if you go to your civic club meeting weekly, you can multiply that distance by 52 or the number visits if you know it.  If you choose this method, you should probably be as detailed as possible and be able to document your visits.  Sticking with my civic club example, you might be able to get a record of your attendance.  Receipts from the office supply store should be in your business records already.  This is, of course, the least convincing method you could produce during an audit.  Provided you are not compiling this estimation once you get the audit notice — probably two to four years after the year end — it’s much better than nothing.
  • Financial records.  Essentially a variation on the estimation method, you can assemble a list of your trips using your existing business records.  If you do work at your customers’ locations, you can use your customer’s addresses and a list of invoices to reconstruct the year’s travel.
  • Dedicated business vehicle.  If have a vehicle that is used exclusively for business, it makes things a lot easier.  You will still need to document the business purpose of your travel.  For this, you could always rely on existing business records such as invoices with your customers’ addresses.

There are probably at least a dozen more solutions out there.  With minimal effort, you can design a system that works for you and fits your work habits.  Whichever system you choose, be consistent and diligent in your use of it.  This will put you in a much better position should you have to support your deduction in an audit situation.

Of course, we can assist you with designing a system or with assessing the state of your records for prior years.

Business Use of Your Vehicle

There is no limit to the confusion and misinformation surrounding this subject. To be sure, it is fairly complex, but the mystification is largely unwarranted. Let’s break it down into a few steps. First…

Do you have business use of your vehicle? One of the founding principles of taxation is definition of a deductible item found in Section 162(a), which reads, “Generally, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business…”. With that in mind, you should first establish that the use of your vehicle is ordinary and necessary in your trade or business. If you don’t have a trade or business, you would fail immediately. Investment activities, hobbies, and passive activities are not a trade or business. Whether the use of your vehicle is ordinary or necessary is much more subjective. As tax accountant, I would have trouble justifying the business use of a Ferrari or an armored car. Further, it’s doubtful that I would need to drive 25,000 miles per year regardless of my choice of vehicle.

Is it used exclusively for business? It certainly makes things easier if you can segregate your business use to one vehicle and reserve another for personal use. More likely, you will have some business and some personal use of your vehicle. In the case of a vehicle that is used 95% for business, you simply reduce the deductible expenses by the 5% personal use portion. This is based on miles driven for business and personal use, so we’ll need to nail that figure down with some certainty.  If the vehicle is largely personal, you can use the cents-per-mile method of calculating your deduction — more on that later — simplifying recordkeeping.

What type of vehicle qualifies? Any vehicle. There is no telling how many large trucks and SUV’s have been sold on this one misconception. While the type of vehicle does matter in terms of calculating the deduction, any vehicle will qualify providing that it is ordinary and necessary for your trade or business. You could even use a motorcycle.

So what’s the deal with 6,000 pounds? A full size truck or a vehicle built on a full size truck frame is exempt from the limitations on vehicle depreciation. These limitations are commonly called the luxury auto limits, although they apply to many vehicles that you would not consider luxurious. In short, the deduction for the cost of a normal passenger vehicle is limited to about $25,000 over the life of the vehicle — five years for tax purposes. I can’t think of many $25,000 luxury cars, can you? A full size truck or SUV with a gross vehicle weight of 6,000 pounds or more is not subject to these limits, so you can recover the entire cost of the vehicle over it’s life. The first year write-off under Section 179 for an SUV is limited to $25,000, but you can then depreciate the remainder without limitation.

We need to stress that the limitation is only for the cost of the vehicle itself, and not the operating expenses. If you decide to drive a Ferrari for business, at least you can deduct the full cost of all the premium fuel you’ll be burning and the expensive repairs and insurance. Also, since accelerated depreciation gets recaptured when you sell a vehicle, that huge front end deduction for the purchase of a full size truck or SUV could come back to haunt you in the future if you sell or stop using it.

Should I own the vehicle personally or let my corporation (or LLC or partnership) buy it? The answer depends on the level of business use. A vehicle that is largely business should probably be titled to your company. One that is largely personal use should be outside the company. It usually not beneficial to sell a vehicle that you already own to your newly formed corporation. The company can simply reimburse you for your use of your personal vehicle, then purchase the next one when the time comes.

Can I use the cents-per-mile rate and not have to total up all my expenses? Most likely, yes. You can choose to either deduct the actual cost of operating the vehicle or take the standard mileage rate — currently $0.51 per mile for 2011. If you choose the actual expenses, you can then depreciate the cost of the vehicle — possibly even writing off the entire amount the first year if you qualify.  Corporations are not allowed to use the standard mileage rate.  They can, however, reimburse the shareholders for use of a personal vehicle.  You cannot use the standard mileage rate if you depreciated you vehicle using one of the accelerated methods (just about any depreciation).  There are only a few other situations where the standard mileage rate cannot be used such as for taxis and other vehicles for hire.

Obviously, you would want to choose the method which will yield the highest deduction.  Generally, if you drive anything other than a large truck or SUV, the standard mileage rate will give you a higher deduction.  If you drive a large vehicle, or haul anything heavy, you will probably want to use actual expenses.  Both methods should be considered, but this is how it usually works out in the real world.  Also, you can switch from standard mileage rate to actual, but you can’t go the other way because it is not available if you claimed accelerated depreciation.

In the next post, we’ll take a closer look at what it takes to effectively document your vehicle’s business use in a way that could survive an audit.

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