As we near the end of 2020, it’s time to look towards 2021 and the tax changes that will take effect. One particular change of interest to most business owners is the standard mileage rate for the use of a car (also vans, pickups, or panel trucks) will decrease from 57.5 cents to 56 cents per mile driven for business use. Additionally, every mile driven for medical or moving purposes for qualified active duty members of the Armed Forces decreased one cent to 16 cents per mile. The only mileage deduction that did not change was for the service of charitable organizations. It remained unchanged at 14 cents as this is set by statute.
The reasons for the reductions are based upon a variety of factors. The standard mileage rate for business use is derived from an annual study of the fixed and variable costs of operating a vehicle and the rate for medical and moving purposes is based on the variable costs. The costs analyzed are fuel prices, slowed depreciation rates and insurance premiums.
Keep in mind that taxpayers always have the option of calculating the actual costs of using their vehicle rather than taking the standard mileage rate deductions. This is referred to as FAVR (fixed and variable rate). This method considers fixed costs like insurance premiums, registration and license fees, depreciation and taxes as well as variable costs such as fuel, maintenance, tires and oil. A taxpayer may opt to change from the standard mileage rate to the actual expense deductions IF the standard mileage rate was used the first year the vehicle was available for business use. Leased vehicles do not have this option, as they must use the standard mileage rate method for the entire lease period if the standard mileage rate is chosen.
When you hire a tax professional from Potts & Company, both methods will be considered based upon your business and which is best for you. To maximize your business, it is vital to understand the different approaches and the legal and financial considerations tied to both. Call, 479.648.2846 to set up a consultation today to get a head start on 2021.