CORRECTION: This story has been updated to correct errors. In the examples provided in this column, the deductions should be $5,100 and $5,550, respectively.
Most real estate agents and brokers spend a good deal of time behind the wheel of their car. Indeed, it’s not uncommon for real estate agents to drive more than 20,000 miles per year for business.
Fortunately, local transportation costs are deductible as business operating expenses if they are ordinary and necessary for your real estate business. Obviously, such expenses are ordinary and necessary for real estate agents and brokers who usually do most of their work away from their office.
It makes no difference what type of transportation you use to make the local trips — car, SUV, limousine, motorcycle, taxi — or whether the vehicle you use is owned or leased.
If you drive a car, SUV or van for business (as most real estate agents do), you have two options for deducting your vehicle expenses:
- You can use the standard mileage rate; or
- You can deduct your actual expenses for gas, depreciation and other driving costs.
Most people use the standard mileage rate because it is simpler and requires less recordkeeping: You need only to keep track of how many business miles you drive, not the actual expenses for your car, such as the amount you pay for gas.
If you use the standard mileage rate, there is good news: Due to the rising cost of gas, the Internal Revenue Service has increased the mileage rate for the second half of 2011.
How the standard mileage rate works
Under the standard mileage rate, you deduct a specified number of cents for every business mile you drive. The IRS sets the standard mileage rate each year. Ordinarily, there is a single standard mileage rate for the entire year. However, there are now two rates for 2011:
- 51 cents per mile for all business driving during Jan. 1, 2011, through June 30, 2011; and
- 55.5 cents per mile for driving during July 1, 2011, through Dec. 31, 2011.
To figure out your deduction, simply multiply your business miles by the applicable standard mileage rate.
Example: Ed drove his car 10,000 miles for his real estate business during the first half of the year, and 10,000 miles during the second half. To determine his car expense deduction, he simply multiplies his business mileage by the applicable standard mileage rate.
His deduction for the first half of 2011 is $5,100 (51 cents multiplied by 10,000 miles equals $5,100). His deduction for the second half of the year is $5,550 (55.5 cents multiplied by 10,000 equals $5,550).
If you choose the standard mileage rate, you cannot deduct actual car operating expenses, such as maintenance and repairs, gasoline and its taxes, oil, insurance, and vehicle registration fees.
All of those items are factored into the rate set by the IRS. And you can’t deduct the cost of the car through depreciation or Section 179 expensing because the car’s depreciation is also factored into the standard mileage rate (as are lease payments for a leased car).
The only expenses you can deduct (because these costs aren’t included in the standard mileage rate) are:
- Interest on a car loan;
- Parking fees and tolls for business trips (but you can’t deduct parking ticket fines or the cost of parking your car at your place of work); and
- Personal property tax that you paid when you bought the vehicle, based on its value. This is often included as part of your auto registration fee.
You must use the standard mileage rate in the first year you use a car for business or you are forever foreclosed from using that method for that car. If you use the standard mileage rate the first year, you can switch to the actual expense method in a later year, and then switch back and forth between the two methods after that, provided the requirements listed below are met.
For this reason, if you’re not sure which method you want to use, it’s a good idea to use the standard mileage rate the first year you use the car for business. This leaves all your options open for later years.
However, this rule does not apply to leased cars. If you lease your car, you must use the standard mileage rate for the entire lease period if you use it in the first year.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.