Form 2106 car deduction

[Pacun]

Client bought a car for 20K. Every year, he runs the car 30K miles of which 20K miles are business miles (un-reimbursed business expenses). For 5 years he uses similar mileage on form 2106. At the end of 5 years, he sells the car for $3,000. So, he has received tax benefits for about 100K miles which is about $40K. How can he calculate a profit when he sold his car?

Let's imagine that this is the only schedule A deduction against the 2% floor. Will that change his basis? Let's say that he made $100K every year so in 5 years the 2% floor amounted to $10K.

[JohnH]

He has no gain or loss on the sale of the car.

[jainen]

>>20K miles are business miles<<

His business basis was reduced to zero by depreciation, so he has a $2000 gain.

[Pacun]

>>20K miles are business miles<<

His business basis was reduced to zero by depreciation, so he has a $2000 gain.

JohnH

Posted Yesterday, 10:42 PM

"He has no gain or loss on the sale of the car."

I would like to answer to both of you "NOT so fast" but I will hold my caballos.

Let's analyze it. So, he has gotten 40K in somewhat "depreciation". That includes oil changes, tune ups and tires, correct? So, maybe he hasn't fully depreciated it. What do you rethink?

[joanmcq]

You need to take the depreciation portion of the SMR for each of the years X the miles driven. If it is more than the business basis in the car, he has gain.

[Pacun]

You need to take the depreciation portion of the SMR for each of the years X the miles driven. If it is more than the business basis in the car, he has gain.

Do you know what percentage of the 50 cents per mile is for SMR of 2010?

[JohnH]

Depreciation Portion of SMR

Year(s)___________Rate per Mile

2008 & 2009_______ $.21

2007_______________.19

2005 & 2006_________.17

2003 & 2004_________.16

2001 & 2002_________.15

2000________________.14

I just used an average of 20 cents per mile in my answer without inquiring about what specific years we are discussing.

My basis is probably too high.

[Pacun]

Depreciation Portion of SMR

Year(s)___________Rate per Mile

2008 & 2009_______ $.21

2007_______________.19

2005 & 2006_________.17

2003 & 2004_________.16

2001 & 2002_________.15

2000________________.14

I just used an average of 20 cents per mile in my answer without inquiring about what specific years we are discussing.

My basis is probably too high.

So, if we use the last 5 years, the average is $.19, so Jainen is right. TP should have a 2/3 gain of the $3000. Are you able to depreciate a car using the standard mileage rate below 0 basis? It seems you can, so could this person could have a profit higher than the $2,000 Jainen is talking, correct?

[joanmcq]

I think it stops at zero.

[Don in Upstate NY]

Where does it say he used the standard mileage rate? Maybe he used actual expenses. It takes six years to fully depreciate an auto with a five year life using the mid-year convention -- longer if he hits the limits on luxury car depreciation. (OK, with a $20K car that probably doesn't affect him - somebody look it up).

How do we address the depreciation he couldn't take because of the 2% subtraction?

[Pacun]

I stated: "Every year, he runs the car 30K miles of which 20K miles are business miles (un-reimbursed business expenses). For 5 years he uses similar mileage on form 2106." I meant that he used the standard mileage NOT depreciation. (I added this after a couple of replies: I meant "actual expenses")

If the $2K floor for 2 percent on for 2106 is not part of depreciation, then JohnH might be right. So I am not sure if JOHNH or JAINEN is right on their answers. Which one do you think is right?

Imagine that the car was purchased on December 28, 2004, placed in service January 2, 2005 and sold on December 31, 2009.

[jainen]

>>he used the standard mileage NOT depreciation<<

Depreciation is mandatory for business vehicle usage, and is an integral part of the standard allowance, with a specific dollar amount required to be used. The 2% floor applies to Schedule A miscellaneous deductions as a whole, not any one particular expense. You can't defer or bank expenses below the threshhold. It's another one of the mysteries of "allowed or allowable."

In reality business usage varies over the five years, so you may have to use the worksheet to calculate gain on sale. In the simple scenario of the original post, it's easy to do in your head. The depreciation component of 100K miles is 19 something, so business basis was reduced from 13 something to zero. 2/3 of the sale price is allocated to business, and counts as gain.

[JohnH]

I think jainen is right.

JohnH has a tendency to shoot from the hip, especially late at night.

(But it does sometimes help to jump-start the conversation).

[Pacun]

(But it does sometimes help to jump-start the conversation).

That's what I try a lot of times. it helps to keep the subject alive. I agree, Jainen is right.

So, If a client says: I have ran my car 2,412 business miles becuase my employer sent me to a different/far away location for 2 months. After I agree that those miles were not commuting miles and TP didn't get reimbursed by his employer, I should asked: When was that? Let's say that TP says January 1st, to March 1st 2009. I should asked: How much did you pay for the car? Let's say that taxpayer says $10,000. My next question will be: How much was the FMV of the car on January 1st 2009? If the tax payer says: $800. My next question will be, how many miles did you run your car in 2009? If the tax payer says 24,120 miles, I will say: The itemized deduction benefit will be $80 and you car will be fully depreciated (10% business usage). Correct?

What will happen when my client goes to you next year and he ran 2,000 business miles on this car and he ran the car 20,000 miles (same 10% business usage)? How will the IRS or you know that I fully depreciated this car? Will that change if the car was only ran 4,000 the whole year (2010)?

[Don in Upstate NY]

From Pub 463, page 25

Does using the standard mileage rate reduce the basis of your car?

Depreciation adjustment when you used the standard mileage rate. If you used the standard mileage rate for the business use of your car, depreciation was included in that rate. The rate of depreciation that was allowed in the standard mileage rate is shown in the chart that follows. You must reduce your basis in your car (but not below zero) by the amount of this depreciation.

What's the standard mileage rate for a fully depreciated car?

If your basis is reduced to zero (but not below zero) through the use of the standard mileage and you continue to use your car for business, no adjustment (reduction) to the mileage rate is necessary. Use the full standard mileage rate (55 cents per mile for 2009) for business miles driven.

[Catherine]

<snip>

JohnH has a tendency to shoot from the hip, especially late at night.

(But it does sometimes help to jump-start the conversation).

"Get your first shot off FAST; that upsets them long enough to make your next shot perfect."

From the "Notebooks of Lazarus Long" section of Heinlein's "Time Enough For Love"

[JohnH]

Pre-emptive action. Reminds me of the old advice from the military about how to handle yourself in a fight with multiple opponents. Pick the biggest, meanest looking one and take your best shot at him. Why?

1) Eventually you're going to have to fight him anyhow - may as well do it while you're fresh.

2) You might get lucky & whip him, which could scare his buddies enough that they'll run away.

(From person experience, it never quite worked out according to plan)

[TAXBILLY]

http://www.taxalmanac.org/index.php/Rev._Proc._2009-54

taxbilly

[jainen]

>>Pick the biggest, meanest looking one and take your best shot at him<<

Often my best shot is to turn to the one, point to the other, and shout, "Are you going to let him say THAT about you?" And then run away.