The tax reform bill, officially called "The Tax Cuts and Jobs Act," H.R. 1, was released on Nov. 2, 2017. The bill contains many provisions affecting both individuals and businesses. If you use your automobile or other vehicle for work or business purposes, it could have a big impact on your mileage deduction.
Please note that none of these provisions have been enacted into law. These are merely proposals that may change soon or they might not be enacted at all. The goal of this post is to speculate on how it would impact the mileage deduction if it passed without any changes.
Under current tax law, employees who incur out-of-pocket expenses do perform their jobs may claim a deduction if they are not reimbursed by the employer. You must itemize your deductions and your expenses are deductible only if they exceed 2 percent of your adjusted gross income.
The most common unreimbursed employee expense is job-related mileage. In 2015, 14.6 million taxpayers claimed this deduction, for a total of more than $96 billion.
The upcoming tax bill eliminates this deduction entirely starting in 2018. This means that if you're an employee who drives for work you won't be able to deduct any of your car expenses on your personal tax return.
If this deduction is eliminated, you should seek to have your employer reimburse you for your work-related mileage. Such reimbursements would be tax-free to you the employee so long as you adequately account for your mileage. They are also tax deductible by your employer.
Alternatively, your employer could provide you with a company car. This would also be tax-free if you only use it for work-related driving (not including personal commuting).
The tax proposal greatly increases the first-year tax write-off for purchasing business property. Currently, business owners may deduct in a single year up to 50 percent of the cost of personal property they purchase for their business. The new law would increase this bonus depreciation amount to 100 percent for property acquired and placed into service from September 27, 2017 through December 31, 2022. Moreover, such 100 percent bonus depreciation would apply for the first time to both new and used property, instead of new property only.
Unfortunately, you don't get full 50 percent bonus depreciation for an automobile you purchase and use for business. Instead, bonus depreciation for automobiles is limited to a set amount each year. Currently, it is $8,000.
Under the Republican proposal, bonus depreciation for automobiles would be increased from $8,000 to $16,000. When combined with regular depreciation, purchasers of automobiles used for business will be able to depreciate a maximum of $19,160 the first year, and then write off the remaining cost over the next several years. This is by far the most first-year depreciation that has ever been allowed for automobiles used for business. Under current law, the maximum first-year deduction is $11,160.
Note that you must use an automobile 100 percent for business to qualify for the full deduction. If you use the vehicle for personal use as well as business use, the limits are reduced by the percentage of personal use. For example, if you use the vehicle 40 percent of the time for personal use, your annual deductions are reduced by 40 percent.
Also, you get no bonus depreciation at all unless you use the vehicle at least 51 percent of the time for business. And you must continue to do so for the first six years you own the vehicle or be required to give back part of your deduction.
To claim the up to $19,160 first-year depreciation deduction for an automobile, you must use the actual expense method to calculate your annual mileage deduction, not the standard mileage rate. With the actual expense method, you must keep track of what you spend on gas and other car expenses and deduct that amount each year.
The standard mileage rate is easier to use because you deduct a set amount for each business mile (currently 53.5 cents) instead of your actual expenses. When you use the actual expense method the first year you own a vehicle you won't be allowed to ever use the standard mileage rate for that vehicle.
Yet, this may well be worth the time and effort to obtain a whopping $19,160 first-year depreciation deduction-far more than you'd likely get if you use the standard mileage rate. The portion of the 2017 standard mileage rate that accounts for depreciation is 25 cents per mile. You'd have to drive over 76,000 business miles per year to get $19,160 in depreciation using the standard rate.
Under current law, purchasers of electric vehicles like the Tesla, or electric plug-in hybrid vehicles like the Toyota Prius, can qualify for a tax credit of up to $7,500. The Republican tax plan eliminates this credit starting in 2018. So, if you've been thinking about buying an electric vehicle, you may wish to do so by the end of 2017.