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Deducting Auto Expenses after the Tax Cuts and Jobs Act

Driving for work just got more expensive for some taxpayers. The Tax Cuts and Jobs Act (TCJA) restricted the deduction of automobile expenses, effective in 2018 in several ways. Using autos for moving is no longer deductible except for members of the Armed Forces. More significantly, employees who use their cars for business but are not reimbursed by their employers can no longer take an itemized deduction for those expenses. To clarify some of these issues, the IRS has issued updated information on vehicle expense deductions in Notice 2018-42.

Moving Expenses

Prior to the TCJA, taxpayers could take a deduction for using their vehicles as part of a move. The deduction rate was 17 cents per mile for 2017. The new tax law suspends the moving expense deduction from 2018 through 2025. This suspension does not apply to members of the Armed Forces on active duty who move under a military order for a permanent change of station. These taxpayers are still allowed the mileage deduction, set at 18 cents per mile for 2018.

Employee Vehicle Use Hit Hard

The new tax law also disallows all miscellaneous itemized deductions, those previously subject to a 2% of adjusted gross income (AGI) floor. Now no deduction is allowed for expenses in this category. Included are the deduction for employee business expenses which are not reimbursed by the employer. Examples include not only employee vehicle use but also expenses for things like uniforms, union dues, and home offices. Thus, employees can no longer claim a deduction at the standard business mileage rate, 54.5 cents per mile in 2018, for business use of their vehicles. This suspension also expires after 2025. Note that self-employed taxpayers still qualify for these deductions, which are reported on Schedule C.

Employer Vehicle Reimbursements at Higher Level

Higher depreciation limits for passenger automobiles are allowed after 2017 under the TCJA. Prior to enactment, the maximum standard automobile cost was $27,300 for passenger automobiles and $31,000 for trucks and vans. For 2018, those amounts are increased to $50,000 for both cars and trucks. This change affects the amount that employers may reimburse and deduct for employee vehicle use.

Employers that use a fixed and variable rate (FAVR) allowance to reimburse employees who use their own vehicles for work can now reimburse at a higher level. The FAVR allowance is a combination of 1) fixed payments that cover an employee’s ownership costs, including depreciation; and 2) variable payments that cover an employee’s use costs. The depreciation element of the FAVR allowance is limited by the depreciation caps on “luxury cars,” which were raised beginning in 2018.

Self-employed Vehicle Deductions and Charitable Mileage

For self-employed taxpayers who file a Schedule C and for other taxpayers who continue to qualify for a vehicle expense deduction, the standard mileage rates for 2018 are:

  • 54.5 cents for every mile of business travel driven, a 1 cent increase from 2017.
  • 18 cents per mile driven for medical purposes (and moving miles for members of the Armed Forces), a 1 cent increase from 2017.
  • 14 cents per mile driven in service of charitable organizations, which is set by statute and remains unchanged.

Note that taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

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