intermediate vehicle expense

Intermediate Vehicle Expense (2010)

Participant’s Guide

Product # H108660Course Code # 84520

Intermediate Vehicle Expense(2010)

A Publication ofH&R Block Services, Inc.

Kansas City, Missouri

Debbie Schott, EA

This publication was written and produced at

Field Support Organization-KC.

Contributors

Team Lead ........................................................................................................Debbie Schott

Quality Review Consultant ........................................................................Kimber Grainger

Tax Proofreader ..............................................................................................Kevin Sullivan

Production Supervisor ....................................................................................Sue Jayaratne

© H&R Block Services, Inc. 2010

Copyright is not claimed in any material secured from official U.S. government sources.

All Rights Reserved

No part of this book may be reproduced or transmitted in any form or by any means, electronic ormechanical, including photocopying, recording, or by any storage or retrieval system, without

permission in writing from H&R Block Services, Inc.

Printed in the U.S.A. April 2010

The information in this textbook is for general use in teaching an income tax course and is not for thepurpose of rendering legal or other professional services or advice. The information is as timely and accurate as possible as of the publication date, but because of legislative changes and administrativeinterpretations subsequent to that date, caution must be used in the application of any information contained herein.

Table of Contents

i

Preface ....................................................................................................iii

VEHICLE EXPENSES

Overview ..............................................................................................1.1Objectives ............................................................................................1.1Methods of Deducting Vehicle Expenses ..........................................1.2Standard Mileage Rate ......................................................................1.2When Each Method Can be Used ......................................................1.4Actual Vehicle Expenses......................................................................1.6Depreciation ........................................................................................1.6

Consequences of Falling Below 50% Business Use ......................1.8Vehicle Depreciation Choices Under MACRS ............................1.14Smaller Vehicles ............................................................................1.14Large Vehicles and Exceptions to the Cap ..................................1.16

Tax Planning ......................................................................................1.18Summary ............................................................................................1.18Further Reading ................................................................................1.19

TRAVEL AND TRANSPORTATION

Overview ..............................................................................................2.1Objectives ............................................................................................2.1Tax Home..............................................................................................2.1

Main Place of Business....................................................................2.2Place the Taxpayer Regularly Lives ..............................................2.3

Travel....................................................................................................2.3Temporary Assignment....................................................................2.4Indefinite Assignment ....................................................................2.4Travel Within the U.S. ....................................................................2.5Armed Forces Reservists ................................................................2.6Conventions ....................................................................................2.6

Qualified Transportation ....................................................................2.7Commuting Expenses ......................................................................2.7Travel Between Work Locations ....................................................2.7Related Issues ..................................................................................2.9

Interviewing a Client for Travel and Transportation Expenses ..2.10Due Diligence ................................................................................2.11

Other TPS Entries ............................................................................2.12More Than One Vehicle ................................................................2.12More Than One Business ............................................................2.12

Summary ............................................................................................2.13

Preface

PURPOSE

The purpose of Intermediate Vehicle Expense is to build on your tax office experience, using TPS toclaim deductible vehicle expenses. This course does not include leased vehicles or the disposition ofvehicles. (For these topics, see Advanced Employee Business Expense.)

PREREQUISITES

This course was written with the assumption that you have good working knowledge of depreciationand TPS. Completion of Intermediate Depreciation, while not required, is recommended.

CONTENT

This course contains two chapters, each requiring a 3-hour session.

At the conclusion of this course, you will be able to:

• Apply the standard mileage rate to business use of a vehicle

• Apply the actual expense method to business use of a vehicle

• Compare methods of depreciating vehicles

• Identify depreciation limits for various vehicles

• Determine a taxpayer’s tax home

• Explain the concept of travel expenses

• Explain the concept of transportation expenses

• Enter into TPS more than one vehicle per business use

• Enter into TPS more than one business use for one vehicle

This course is designed to provide you with the information you will need when assisting a typical tax-payer. Because the same course contents are used throughout the United States, some topics may bemore or less pertinent in your area.

The information in this course is based on tax law as it applies to the 2009 tax year. Tax laws are in aconstant state of change and this course information reflects laws at the time of printing. It is yourresponsibility to remain current on tax law.

iii

VISUAL CUES

Throughout this textbook, you will find visual cues, known as icons, designed to help you quickly iden-tify types of information. The chart below explains the type of information associated with each icon.

iv

COURSE CREDIT

If all the requirements of the Continuing Professional Education program* are met, you are eligible toreceive up to six CPE credits for attending all sessions and passing the exam of this course.

* For complete rules of the Continuing Professional Education Programs, refer to the 2010 TaxProfessional Continuing Professional Education Handbook posted on Knowledge Development,Client Facing Associate Experience’s (CFAE) site of myBlock for the Tax Office.

IRS and NASBA Continuing Professional Education Credit

H&R Block is an authorized sponsor of CPE with the IRS. Therefore, TTS courses that focus primari-ly on tax theory qualify for Enrolled Agent (EA) credit. This course qualifies for six CPE hours for EAs.

H&R Block is not currently an authorized sponsor of CPE with the National Association of StateBoards of Accountancy (NASBA). If you are a CPA, contact your state Board of Accountancy to deter-mine if this course qualifies for CPE.

COURSE COMPLETION

To improve the Tax Professional’s learning experience, we have moved exams to an online environ-ment. In this environment, Tax Professionals are no longer required to take exams in the tax office.

This new method for taking exams allows Tax Professionals to complete the Instructor Course evalu-ation, online exam, and print the Certificate of Credit from the appropriate myBlock for the Tax Officesite.

Once you have entered the appropriate myBlock site, complete the steps below to access the onlineexam.

1. Select the myCareer tab at the top of the page.

2. Select the myCertification link. Result: A list of all courses you are enrolled in will be displayed.

3. Click the Take Exam link for the appropriate course. Result: The exam displays and is ready to becompleted.

The Certificate of Credit is available for your records. Once you have completed the online courseexam, the certificate link will be enabled. Click the link to print the Certificate of Credit.

v

PARTICIPANT ATTENDANCE RECORD

Included after this preface is an attendance sheet you may maintain for your records. There are placesfor your instructor to initial as sessions are completed and sign when the course is complete.

vi

vii

Intermediate Vehicle Expense

Participant Attendance Record

Participant Name:______________________________________________________

Participant PeopleSoft #:________________________________________________

Instructor Name:_______________________________________________________

Location:____________________________ _______________________________

(Address) (City, State)

Total Hours_____

Instructor Signature Date Exam Score

SESSION # SESSION TITLE DATEATTEND?YES/NO

INSTRUCTORINITIALS

1 Vehicle Expenses

2 Travel and Transportation

1Vehicle Expenses

OVERVIEW

Each Tax Professional wants their clients to proclaim: “H&R Block’speople are tax experts. They know me and treat me with respect. Iknow they will be there for me, which is why I come back year afteryear and throughout the year.”

One great way to show your expertise and deliver a superior clientexperience is to learn all about vehicle expenses and how to enterthem with ease and confidence into TPS.

The reporting mechanisms for vehicle deductions are almost identi-cal whether they are reported on Form 2106 or on Schedules C, E, orF. Sometimes, the same vehicle is used for expenses related to morethan one trade or business. Topics in this course include:

• Standard mileage rate

• Actual expense method

• Vehicle depreciation limits

• Vehicle expenses for travel and transportation

For the Chapter 1 exercises, we assume all stated expenses aredeductible for trade or business use. We do so to concentrate on enter-ing these expenses into TPS. Then in Chapter 2, we will examine thedefinitions of travel and transportation and see how to determinequalified vehicle expenses. Finally, we will close the course with com-pleting a TPS return that includes vehicle expense deductions.

OBJECTIVES

At the conclusion of this chapter, you will be able to:

• Apply the standard mileage rate to business use of a vehicle

• Apply the actual expense method to business use of a vehicle

• Compare methods of depreciating vehicles

• Identify depreciation limits for various vehicles

• Enter vehicle expenses onto TPS screens

1.1

METHODS OF DEDUCTING VEHICLE EXPENSES

Taxpayers who use their own personal vehicles in their trades orbusinesses have two choices for computing the deductible expense:

• The standard mileage rate

• Actual vehicle expenses

For either method, the taxpayer (or spouse if married filing jointly)must own or lease the vehicle.

Complete Exercise 1A before continuing to read.

STANDARD MILEAGE RATE

The standard mileage rate is a method of deducting vehicle expenseswhich averages all expenses, including depreciation, for a “standard”vehicle and expresses the deduction as a rate per mile. Taxpayersthen apply this standard mileage rate to their own vehicle’s trans-portation or travel mileage. For the standard mileage rate, a vehicleis a car, van, pickup, or panel truck.

In 2009, the standard mileage rate for vehicles used in a trade orbusiness is 55¢ per mile.

�Example: On August 10, 2009, Hope Accord (828-01-1026) beganusing her 2008 Honda, her only vehicle, for employee business pur-poses. Her basis for depreciation for this vehicle is $14,200. She droveher car 12,975 total miles. Of this mileage, 3,310 miles were businessmiles. Her average daily commute was 15 miles round-trip, and sheworked 210 days in the year. She keeps a log book to record theamount and purpose of miles she puts on her car for business. SeeForm 2106EZ in Illustration 1.1, which records Hope’s vehicleexpense.�

The standard mileage rate is not allowed for:

• Taxis or cars for hire

• Five or more cars used at the same time (a fleet of vehicles)

• A vehicle in subsequent years when accelerated depreciation,bonus depreciation, or a §179 deduction was taken in the year thevehicle was placed in service

• A rural mail carrier’s vehicle when the carrier received qualifiedreimbursement

The choice to use the standard mileage rate must be made by the duedate (including extensions).

1.2 H&R Block Intermediate Vehicle Expense (2010)

E-file tip: Ataxpayer who

wishes to deduct vehicleexpenses certifies that theyhave evidence to supporttheir deduction.

To file the return electroni-cally, they must certify thattheir evidence is written.

In the example shown inIllustration 1.1, the answersto Form 2106EZ, lines 11aand 11b, provide this certifi-cation.

Vehicle Expenses 1.3

Illustration 1.1


Documentation

To document vehicle expense using the standard mileage rate, thetaxpayer keeps a record per vehicle of mileage at the beginning andend of the year and also keeps a log of the dates, purpose, and milestraveled for business use and miles traveled for commuting.

Stop for your instructor’s demonstration.

WHEN EACH METHOD CAN BE USED

If the standard mileage rate is used the year the vehicle is placed intoservice and the taxpayer owns the vehicle, the taxpayer has thechoice in subsequent years of using either the standard mileage rateor actual vehicle expenses. But if the standard mileage rate is usedfor a leased vehicle, it must be used for the entire lease period.

If the actual vehicle expense method (which we will study next)—with MACRS depreciation, bonus depreciation*, or the §179 deduc-tion—is used for the year the vehicle is placed in service, the actualexpense method is used for all subsequent years for that vehicle.

*Depreciation of property placed in service after September 10, 2001,may have included 30% or 50% bonus depreciation. The only newdepreciation after December 31, 2005, and before January 1, 2008,that could be eligible for bonus depreciation is Gulf Opportunity Zoneproperty. The Economic Stimulus Act of 2008 reintroduced 50% bonusdepreciation, and The American Recovery and Reinvestment Act of2009 extended 50% bonus depreciation for 2009. See the KnowledgeBase article, copied in Illustration 1.2, for a description of propertythat qualifies for bonus depreciation and links to more related arti-cles that define the requirements for bonus depreciation. All areaccessible through myBlockSM for the Tax Office (MBTO) at theQuickLink labeled, “Tax Research – Tax Institute.”

The acquisition date test is that, generally, the property must beacquired by the taxpayer after December 31, 2007, and beforeJanuary 1, 2010, and no written binding contract to acquire the prop-erty may be in effect for the asset before January 1, 2008.

The property must be placed in service by the taxpayer beforeJanuary 1, 2010.

The original use of the property must begin with the taxpayer afterDecember 31, 2007. Original use means that the property must benew property rather than “used” property when it is first placed inservice by the taxpayer.

Stop for your instructor’s MBTO demonstration.

TPS tip: If thestandard mileagerate was used inthe first year of

business use and your clientchanges to the actualexpenses method, the carcannot be depreciated underregular MACRS rules.Straight-line depreciation isused over the estimatedremaining useful life (deter-mined by mileage) of the car.This situation is explainedin the F1 Help screen inTPS.


Illustration 1.2

ACTUAL VEHICLE EXPENSES

Actual vehicle expenses include all of the operating expenses the tax-payer paid for:

• Gas • Oil and lubrication

• Maintenance • Repairs

• Garage rent • Auto club

• Insurance • Vehicle license

• Registration fees • Tires

Actual expenses also include an amount for one of the following:

• Depreciation subject to an annual dollar limit (Illustration 1.3)

• Lease payments subject to an inclusion amount (See AdvancedEmployee Business Expense)

The business-use percentage is determined by dividing businessmiles by total miles. This percentage is then applied to the actualexpenses to determine the vehicle expense deduction.

Note: Fines and legal fees for parking or moving violations are neverdeductible.

Complete Exercise 1B before continuing to read.

DEPRECIATION

Since a vehicle is expected to last more than one year, its cost is gen-erally recovered over its class life. Cost recovery includes depreciation,bonus depreciation (when available), and the §179 deduction.

Special rules apply to cost recovery of certain property that is easilyaccessible for personal use. This property is called listed property.

Two of the five types of listed property are:

• Passenger cars having a 6,000 pounds or less gross vehicle weight(not including taxis or limousines or other nonpersonal-use vehi-cles).

• Large vehicles used as a means of transportation, such as SUVsand large vans. This category includes vehicles likely to be used forpersonal purposes due to their nature or design (excludes nonper-sonal-use vehicles, such as: emergency vehicles, large trucks withGVW over 14,000 pounds, school buses, and other special dutyvehicles).


Smart find: Theactual expensemethod of comput-ing vehicle

expenses may be used for allautomobiles and trucks,from vans to semi-tractors,as long as adequate recordsand substantiation of theexpenses are maintained.

Smart alert: Fortax years January1, 2004, throughDecember 31,

2009, taxpayers may elect todeduct state and local gener-al sales taxes and compen-sating use taxes instead ofstate and local income taxes.When a taxpayer elects todeduct sales tax on ScheduleA, line 5, any sales tax paidfor a vehicle is part of thatdeduction. If the taxpayer,instead, chooses to deductstate and local income taxespaid, the amount paid forstate and local sales taxes isadded to the depreciablebasis of the vehicle.


Illustration 1.3

Consequences of Falling Below 50% Business Use

Business use of 50% or less limits the type and amount of deprecia-tion which may be taken. When listed property falls to 50% or lessbusiness use, even if the §179 deduction had not been taken:

• The excess of prior accelerated depreciation over straight-lineunder the ADS recovery period is recaptured as taxable income inthe year of the drop to 50% or less business use.

• Straight-line depreciation over the ADS recovery period continuesfor all future years.

For more information, see the H&R Block courses, AdvancedDisposition of Business Assets and Intermediate Depreciation.

Case Study

Let’s use Schedule C for the demonstration of how to enter the actu-al expense method into TPS.

�Example: On January 15, Trina Riley (828-01-2027) began usingher 2009 Ford, in her business of making and selling handbags. Shedrove her car 12,000 total miles. Of this mileage, 10,285 miles werebusiness miles. She has no commuting mileage for this vehicle. Shekeeps a log book to record the amount and purpose of miles she putson her car for business. She has no other car for personal use. Trinapaid a total of $23,500 for the Ford. Her actual vehicle expenses forthe year were:

Gas/oil/lube $1,698

Tires/batteries/repairs/etc. 2,500

Insurance/licenses 890

Finance charge 1,110

Personal property tax 870

Your Instructor will demonstrate entering this vehicle onto theSchedule C screen in TPS.�

The following screen shots summarize this process. Add your ownnotes to guide you through TPS entry.

Screen 1 includes all the information entered on the Schedule Cscreen for Trina’s business down to line 9, Listed property vehicleexpenses. Enter Y here to access the vehicle entry screens. By mak-ing this entry, you have made a preliminary determination that theitem you enter on this line is listed property.


Smart find:Because Trina isself-employed, sheincludes as a vehi-

cle expense a portion of thepersonal property tax shepaid. If she were an employ-ee who claimed businessexpenses, she would haveclaimed 100% of the person-al property tax that she paidon her vehicle as a ScheduleA deduction.


Screen 1


Screen 2

Screen 3

Parking and tolls and other local transportation are deductible in addition to the amount of the vehi-cle expense deduction. This is true for either the standard mileage rate or the actual vehicle expensemethod. Notice that Screen 2 asks the questions about evidence and written evidence.

Screen 3 sets several limits for size and type of vehicle. After the entry for commuting miles the depre-ciation screen pops up. We enter A for actual expense method and Y because Trina owns the vehicle.Enter N because no other vehicle is available for personal use, and Y because her vehicle is availableduring off duty hours. Enter N at the question about vehicle weight because her vehicle is a passen-ger car.

This first question opensup the possibility of twocategories of vehicles:

• Nonpersonal use

• SUVs and heavy vans

If the answer to the firstquestions is 'Yes,' the sec-ond question determineswhich of the two possibili-ties is the correct choice forthis vehicle.


Screen 4

Before you can enter any operating expenses, you must complete the depreciation screens. The TYPcolumn on Screen 4 identifies this depreciation screen as being for listed property items.

Take care in entering each field on Screen 5. To assure that all computations have been made, alwaysenter to the end of this screen. Notice that Trina may take bonus depreciation because her businessuse is 50% or more.

Screen 5


Screen 6

Screen 7

Midway through Screen 5, a pop-up brings you to Screen 6. In 2008, bonus depreciation is the default.To opt out of this additional 50% depreciation allowance, enter Y in the appropriate boxes on thisscreen. You cannot remove bonus depreciation directly on the depreciation screen after entries havealready been made. Instead, go to the forms selection menu and select Miscellaneous Forms, MoreForms, select OPTOUT of Addl Depr.

Once you have entered to the end of the depreciation screen, enter F10, and then enter Y to accessoperating expenses.


Screen 8

Screen 9

Screen 10

On Screen 8, be sure to enter 100% of the car’s expenses for the year. TPS will account for less than100% business usage and less than 12 months of the year business usage. This screen provides anopportunity for you to remind your client to be sure to keep good records of all vehicle expenses.

Self-employed taxpayers enter 100% of the vehicle’s finance charges and interest and also 100% of thepersonal property tax paid. This screen gives the option to carry the personal portion of property tax to Schedule A.

Trina’s car operating expenses are carried to Schedule C, line 9, and the allowable depreciation deduc-tion is carried to line 13. If Trina had used the standard mileage rate, the total would have beenentered on line 9.

Vehicle Depreciation Choices Under MACRS

Trina chose the most common method of depreciation, 5-year, 200%declining balance, and she claimed bonus depreciation. There arethree possible methods to depreciate vehicles under MACRS:

• The 200% declining balance method (200% DB) over a five-yearrecovery period that switches to the straight-line method whenthat method provides an equal or greater deduction

• The 150% DB method over a five-year recovery period that switch-es to the straight-line method when that method provides an equalor greater deduction

• The straight-line (SL) method over a five-year recovery period

Under all options, the §179 deduction and bonus depreciation is avail-able for eligible property with more than 50% business use.

Smaller Vehicles

Trina’s car is typical. Most business-use vehicles, 5-year propertyunder MACRS, are listed property subject to annual depreciation dol-lar caps. This limit applies to vehicles, which are either:

• Passenger cars under 6,000 pounds unloaded gross vehicle weight

• Light trucks or vans (passenger cars built on a truck chassis,including minivans and SUVs) under 6,000 pounds gross (loaded)vehicle weight

Recent annual passenger automobile and light truck depreciationlimits are shown in Illustration 1.3. Notice that the depreciation lim-its for passenger cars are slightly different from the depreciation lim-its for light trucks.

Working Within the Vehicle Depreciation Limit

Look at Screen 10 on page 1.13. What is the amount of depreciationTrina claimed on her Ford? $9,394. How did we arrive at thatamount? The allowable depreciation deduction is equal to the lesserof the business-use percentage multiplied by one of the following:

• The ordinary MACRS deduction computed without regard to thelimit

• The limit amount, applied to the sum of the amounts claimed forthe §179 deduction and depreciation (including bonus deprecia-tion)

Let’s look at both of these options for Trina. From the VehicleDepreciation Limits table, the 2009 first-year passenger automobiledepreciation limit is $10,960. This amount includes bonus deprecia-tion.


Smart alert: Acar first usedexclusively forpersonal purposes:

• Cannot qualify for the§179 deduction in a lateryear when its usechanges to business

• Uses as the basis fordepreciation the lesser ofthe fair market value atthe time put into serviceor adjusted basis on thedate of conversion


Her allowable deduction is calculated as follows:

Deduction without regard to limitCost $23,500

Times: Business-use percentage � 85.71%Business basis 20,142

Minus: 50% bonus depreciation (10,071)

MACRS basis 10,071Times: Rate from MACRS table � 20%

MACRS deduction 2,014

$10,071 bonus + $2,014 MACRS deduction = $12,085

Deduction limitMaximum allowable car deduction for 2009 $10,960Times: Business-use percentage � 85.71%

Maximum allowable deduction $9,394

Allowable deduction (lesser of the $12,085deduction without regard to limit or the$9,394 deduction limit)

$9,394

Smart alert:Because of the capon vehicle depreci-ation, a business-

use vehicle may be depreci-ated longer than the stan-dard six years which isusual for 5-year MACRSproperty.

Large Vehicles and Exceptions to the Cap

Two other types of vehicles, also 5-year property under MACRS, arenot subject to the annual vehicle depreciation limits as stated inIllustration 1.3. These are:

• Nonpersonal use vehicles, defined as nonlisted property. Theseare vehicles configured in a way unlikely for them to be used forpersonal use. They have no vehicle depreciation limit and no §179expense limit. These are vehicles with at least one of the following:

▪▪ Seating capacity for more than nine passengers behind the dri-ver’s seat, such as a hotel shuttle bus

▪▪ Cargo area at least six feet in length not easily accessible fromthe passenger compartment, such as a pickup truck with a 6.5foot pickup box

▪▪ No seating behind the driver, such as a delivery truck with per-manent shelving for packages and only a seat for the driver(could include jumpseat)

• Heavy vehicles, defined as listed property but not subject todepreciation limits for passenger vehicles. These are SUVs andvans built on a truck chassis and rated at more than 6,000 poundsgross (loaded) vehicle weight (GVW). After October 22, 2004, a§179 expense deduction of up to $25,000 may be taken on eitherheavy vans or heavy SUVs. The basis of the SUV is multiplied bythe business-use percentage to determine the business basis.However, the $25,000 limit is an overall limit which is not reducedby the business-use percentage.

See Illustration 1.4 for a summary chart to help you determine typesof vehicles for depreciation purposes.

Chet, in the following example, wishes to maximize his §179 deduc-tion.


DEPRECIABLE VEHICLES

Any nonpersonal-use vehiclenot listed property, could include:

Owned or leased personal-use vehicleslisted property

• Cars and light trucks• Heavy vehicles, 6,000–14,000 lbs.• Any vehicle over 14,000 lbs.

No annual depreciation limits andno limit to §179 deduction*

Passenger cars and light trucks under 6,000 pounds—annual depreciation limits for vehicles which are thenreduced by the business-use percentage.

SUVs and heavy vans, 6,000–14,000 GVW—no annualdepreciation limits. However, $25,000 limit to §179deduction* is not reduced by business-use percentage.

*The Form 4562 limits for the total §179 expense deduction still apply.

Smart find:Nonpersonal-usevehicles, regard-less of weight, are

personal property not sub-ject to the listed propertyrules.

Illustration 1.4

Smart find: Howdo you determinegross vehicleweight (GVW)?

The GVW is located on alabel attached to the insideedge of the driver’s side door.


�Example: Chet purchased and placed into service on January 20,2009, a 2009 Chevrolet Suburban (which weighs over 6,000 pounds)and had 85% business use on his SUV in 2009. He wants to expenseas much as possible.

In future years, as long as his business use is more than 50%, Chetwill not have any taxable recovery on this stellar first-year deduction.Illustration 1.5 is Chet’s Asset Summary for the Suburban.�

Illustration 1.5

Cost $41,500Times: Business-use percentage � 85.0%

Business basis 35,275Minus: §179 deduction (25,000)

Business basis after §179 deduction 10,275Minus: 2009 additional depreciation allowance (5,138)

Depreciable amount 5,137Current-year deduction (1,027)

The total current-year depreciation deduction for the Suburbanis $31,165. [$25,000 §179 deduction + $5,138 bonus depreciation+ $1,027 current-year deduction = $31,165]


Documentation

A taxpayer claiming actual car expenses maintains records per vehi-cle of all of the following:

• All actual expenses

• Total annual mileage, commuting mileage, and business-usemileage

• Time, purpose, and location of business-use travel or transporta-tion

Complete Exercise 1C before continuing to read.

TAX PLANNING

Since our clients want us to be their tax expert and advocate, theyroutinely ask our advice on how to deduct expenses for business useof their vehicles. Always remember:

• The Tax Professional provides information.

• The client decides.

Our duty is to be complete and accurate. And our obligation extendsto advice for future years based on our clients’ expectations. Imaginewe took a poll of H&R Block clients and asked them:

“How important is it to you to obtain the greatest refund possiblefor this tax year even if doing so costs you money in the future?”

The replies would range from one extreme, “I need every dollar I canget this year no matter how you say it will affect me in the future,” to,“I’m fine with this tax return as is, but I sure do not want to get hitfor more taxes in the future when I’ll be less able to pay.” It is ourduty to respect our clients by explaining the tax implications of theirchoices and then letting them decide. Chet, from the example on page1.17, used up almost all of the depreciation portion of the Suburbanin the the first year it was placed into service. He might see this as agreat windfall–or, he might want to reserve more depreciation fornext year when he expects to have more income from his business.The choice is his. It is our duty to be sure it is an informed choice.

SUMMARY

Taxpayers often have the choice of claiming their vehicle expenseseither using the standard mileage rate or the actual expense method.Taxpayers electing to claim actual vehicle expenses can choose from


multiple options for depreciation. To take advantage of all options,business use must be greater than 50%.

It is the Tax Professional’s responsibility to explain the possibilitiesfor deducting the business use of their vehicles. But the actual choiceis theirs.

FURTHER READING

For more information about this chapter, see IRS Publication 463,Travel, Entertainment, Gift, and Car Expenses, and Publication 946,How to Depreciate Property.

1Vehicle Expenses

EXERCISE 1A

Use the forms on pages W1.2–W1.9 to help you complete the following table.Your instructor will lead you in this exercise.

W1.1

VEHICLE EXPENSE REPORTING

Trade or business Form to claim Line to report Questions Special conditions

Employee

Sole proprietorship

Rental

Farm

W1.2 H&R Block Intermediate Vehicle Expense (2010)

Vehicle Expenses W1.3

EXERCISE 1B

Use the Vehicle Depreciation Limits table in Illustration 1.3 to answer thefollowing:

1. List the maximum annual deduction for each of the following yearsfor a light truck placed into service in 2007.

2007

2008

2009

2. What is the maximum 2009 depreciation deduction for a car placedin service in 2004?

3. What is the maximum 2009 depreciation deduction for a light truckplaced into service in 2008 with 10,500 total miles in 2009 and 8,400business miles?



EXERCISE 1C

Match the vehicles in column A with the depreciation deduction limits in col-umn B. All vehicles were placed in service in 2009. There may be multipleanswers from Column B for each Column A entry.

Column A Column B

1. Car with 25% business use a. No bonus depreciation

2. Heavy SUV b. $15,000

3. New car purchased in 2009 with 80% business use c. $2,960

4. Truck purchased in 2007 d. $3,160

5. Nonpersonal-use van purchased in 2009 for $30,000 e. $30,000 maximum §179 deduction

6. Car purchased in 2008, put into service in 2009 f. No §179 deduction

g. $25,000 §179 deduction

h. $8,768

Solution 1B

1. The annual depreciation limits are: $3,260 for 2007, $5,200 for 2008, and$3,050 for 2009.

2. $1,675

3. $4,080 [$5,100 maximum at 100% business use � (8,400 business miles �10,500 total miles) = $4,080]

Solution 1C

1. a, f

2. g (could arbitrarily choose b, c, or d—not limits for SUV)

3. h [$10,960 � 80% = $8,768]

4. a, d, f

5. e

6. a, c, f


Now continue reading in your text.


TPS CLASS EXERCISE 1

Chet Ford’s Schedule C has been prepared for you in a shell return, accessedby entering 828-01-3028 in Case Studies mode. In each situation, add thedeductible operating expense plus the total depreciation deduction to arriveat a total deduction for the vehicle. Enter this amount on the blank line atthe end of each situation. Tip: Use F1 Help as needed.New SSN __________________________

Chet spent $41,500 to purchase a 2009 Chevrolet Suburban (which weighsover 6,000 pounds) and placed it into service on the same day, January 20,2009. At the end of 2009, he had 8,500 business miles, 10,000 total miles, andno commuting miles. It was not acquired through a trade-in. He had the fol-lowing vehicle expenses in 2009:

Gas and oil $2,424

Insurance 2,510

Washing and waxing 600

Finance charge 2,595

Personal property tax 1,210

Chet has another car for personal use, and his vehicle was available forpersonal use. He has written evidence to support his deductions. Use TPSto complete the depreciation three ways.

1. Chet wishes to use regular MACRS (including bonus depreciation)on the entire depreciable basis of the vehicle. _____________

2. Chet has high income for the year and intends to continue using theSuburban more than 50% for business use. Therefore, he wishes toexpense (claim the §179 deduction on) the maximum amountallowed and use regular MACRS for the balance. ____________

3. Chet outfitted the area behind the driver’s seat in such a way as toqualify the vehicle as a nonpersonal-use vehicle and wishes toexpense as much as possible. He forgot to report an additional$20,000 of business income and wants to expense as much as possi-ble to absorb this income. He plans to continue using the Suburbanmore than 50% for business use. ____________

Use the same three methods of depreciation, but assume that instead of aheavy SUV, the vehicle is a luxury car under 6,000 pounds:

4. Regular MACRS (including bonus depreciation) on the entire depre-ciable basis of the vehicle. ____________

5. Maximum §179 deduction and regular MACRS for the balance._____________

6. Maximum §179 deduction and regular MACRS for the balance fornonpersonal-use vehicle ____________

7. List other ways Chet could have claimed vehicle expenses for the SUV orfor the car.

Note: If Chet were your client, you would interview him for other ScheduleC expenses. For this TPS exercise, we are only using vehicle expenses so thatyou can see exactly what amount is carried to which line on the Schedule C.

Solution TPS Class Exercise 1

Following is the expenses portion of Schedule C for each of the six situations.

1.

2.



3. and 6. A nonpersonal-use vehicle may be a vehicle of any weight.

The F1 Help accessed at the question about an SUV not more than 14,000pounds helps you arrive at the correct answer for the depreciation for a non-personal-use vehicle.

4. and 5.

7. Other ways Chet could have claimed vehicle expenses for the SUV or forthe car are:

A. Standard mileage rate

B. Regular MACRS opting out of bonus depreciation

C. 150% declining balance MACRS

D. Straight-line MACRS


2Travel and Transportation

OVERVIEW

Chapter 1 opened the study of vehicle expenses focusing on the typeof vehicle and the method used to take a deduction for its businessuse. All of the Chapter 1 exercises assumed the stated expenses weredeductible. Chapter 2 brings us back to the real world where most ofthe tax interview is spent trying to determine which expenses arequalified expenses and how much of the vehicle expense is deductible.

The final topics are TPS entry for more than one vehicle for one busi-ness activity and TPS entry to allocate expenses of one vehicle tomore than one business activity. You will now learn which vehiclemileage is considered to be business mileage.

Complete Exercise 2A at home as a review before continuing toread.

OBJECTIVES

At the conclusion of this chapter, you will be able to:

• Determine a taxpayer’s tax home

• Explain the concept of travel expenses

• Explain the concept of transportation expenses

• Enter into TPS more than one vehicle per business use

• Enter into TPS more than one business use for one vehicle

• Advise a client on methods of deducting vehicle expenses for agiven situation

TAX HOME

When a taxpayer works away from their tax home (the general areaof their principal place of business or employment) the following trav-el expenses are deductible:

• Transportation costs to and from the place(s) outside the tax home

• Living expenses while away from the tax home

2.1


Before considering a taxpayer’s travel expenses away from home, youhave to locate the taxpayer’s tax home. The Tax Institute at H&RBlock receives many questions from those who confuse domicile withtax home.

Determining the tax home follows in a logical progression from 1 to4. A taxpayer’s tax home is:

1. The regular place of business or post of duty, regardless of wherethe taxpayer maintains the family home

2. The main place of business if the taxpayer has two or more placesof business

3. The place the taxpayer regularly lives if there is no place of busi-ness

4. No place if the taxpayer has no place of business and no place ofregular residence

If the taxpayer’s case is the fourth situation, the taxpayer has no taxhome and is an itinerant worker. An itinerant worker is never awayfrom home and therefore has no travel expenses (though they mayhave transportation expenses). The H&R Block Income Tax Course(formerly Basic Building Blocks) refers to these workers as short-term workers, who may not deduct the cost of transportation fromhome to work and the return, but who may generate a deduction ifthey work at more than one work site during the day.

Main Place of Business

A person’s tax home is the entire city or general area where the prin-cipal place of business, employment, or post of duty is located, regard-less of where the taxpayer’s family residence is located. If a taxpayerhas more than one place of business or employment, the tax home isthe main place of business determined by these factors:

• The amount of income earned in each area

• The total time ordinarily spent in performing duties in each area

• The level of business activity in each area

�Example: Sue lives in Chicago where she has a seasonal job foreight months of the year and earns $28,000. The remaining fourmonths of the year she works in Atlanta where she earns $17,000.Chicago is her principal place of employment because she spendsmore time and earns more of her income there.�

Without a substantial difference in income between business-locationareas, the tax home is usually the area in which the taxpayer spendsmore time.

Travel and Transportation 2.3

Place the Taxpayer Regularly Lives

If a taxpayer does not have a regular or main place of business, thetax home is sometimes the taxpayer’s primary residence. If a taxpay-er answers “yes” to all of the following three questions, the primaryresidence is the taxpayer’s tax home. Does the taxpayer:

• Have part of their business in the area of their residence and usethat residence while doing business there?

• Have living expenses at their main home which are duplicatedbecause of business travel away from that home?

• Maintain the area in which both their historical place of lodgingand their claimed main home are located? This question could berephrased: Does the taxpayer have family members living in theprimary residence? Or, does the taxpayer frequently or usually usethe primary residence for lodging?

If two of the questions can be answered “yes,” the primary residencemay be the taxpayer’s tax home, depending on the facts and circum-stances. If fewer than two of the questions are answered “yes,” thetaxpayer either has a different tax home from the primary residenceor has no tax home.

Complete Exercise 2B before continuing to read.

TRAVEL

Taxpayers incur travel expenses if they are away from their taxhomes on business for a time period substantially longer than anordinary day’s work and they are in need of rest to meet the demandsof that work. It is not necessary to be away from home for 24 hours oreven from dusk to dawn, provided the taxpayer is released from dutyto get necessary sleep or rest.

�Example: A truck driver who is away from the home terminal for 16hours, during which he is released for six hours to obtain sleep and toeat, is considered away from home overnight. A two-hour break to eatand relax, however, does not qualify.�

The following vehicle expenses, when reasonable and necessary andnot lavish or extravagant, are components of travel expense:

• Operation and maintenance of a personal vehicle.

• Transportation to and from the airport or station, from one cus-tomer to another, from hotel to customer, or from one place of busi-ness to another.

• Transportation from the temporary lodging to the temporary workassignment.

Temporary Assignment

A temporary assignment is work at a location that is different froman employee’s regular workplace. If it is not practical to return homeat the end of each day’s work, some expenses are deductible. Theseare the necessary travel expenses for initially getting to the tempo-rary assignment and for returning to the taxpayer’s home at the endof the assignment.

If a taxpayer travels back and forth each day to a temporary assign-ment location, either in the taxpayer’s metropolitan area or awayfrom the tax home, the cost of daily round-trip transportation is alsodeductible. Reasonable expenses for meals and lodging (even for daysoff) while living at this other location are deductible.

To qualify as a temporary assignment, both of the following must betrue:

• The taxpayer must have a permanent tax home.

• The business trip or job assignment must be temporary in nature.It must be realistically expected to last for a period of one year orless. Once a job assignment lasts more than one year, it is nolonger temporary.

Weekends and Days Off

If a taxpayer returns home on weekends or on other days off from atemporary assignment, round-trip travel expenses, including mealsand lodging en route, are generally deductible. They are deductible tothe extent they do not exceed what the taxpayer would pay for mealsand lodging while remaining at the temporary location. If lodging isobtained by the week or month, the cost of the retained lodging isdeductible and the deduction for returning home is limited to theamount meals would have cost at the temporary location. The cost ofmeals and lodging while in the taxpayer’s hometown is notdeductible.

Indefinite Assignment

If the work at the new location is expected to last indefinitely, the newlocation is the taxpayer’s tax home. In this case, expenses for travel,including meals and lodging, are not deductible. Employment is con-sidered indefinite if either of the following apply. The assignment is:

• Reasonably expected to last for more than one year, even if it doesnot last for an entire year.

• Accepted with the understanding that if the taxpayer’s work issatisfactory for a probationary period, the job will become perma-nent.



�Examples:

1. Al is regularly employed in St. Louis. He accepted work inKansas City, 250 miles from St. Louis. Al realistically expectedthe work in Kansas City to be completed within six months andplanned to return to St. Louis at that time. His employment actu-ally lasted ten months, after which time Al returned to St. Louis.

Al’s travel expenses are deductible. It does not matter that thework lasted longer than originally expected because the worklasted less than one year and was originally expected to last lessthan one year.

2. The facts are the same as in example 1 except that Al realistical-ly expected his work in Kansas City to be completed in 18months, and it was actually completed in 10 months.

In this situation, the expenses are not deductible since the workdid not qualify as temporary at the time Al started; the actualtime Al worked at the Kansas City location is irrelevant.

3. The facts are the same as in example 1 except that Al realistical-ly expected the work to be completed in nine months. After eightmonths, he was asked to remain for seven more months.

In this situation, Al’s expenses for the first eight months aredeductible because he realistically expected the work to be com-pleted in nine months. However, after the eighth month, it wasno longer realistic for Al to expect the work in Kansas City to lastone year or less. Therefore, his employment in Kansas City istemporary for eight months and indefinite for the remainingseven months.�

Travel Within the U.S.

When a trip is entirely for business purposes, the travel expensesincurred are deductible. If the trip is solely for personal purposes, thetravel expenses are nondeductible.

If the trip is primarily for business purposes but includes a nonbusi-ness purpose, the following are deductible:

• Travel expenses to and from the business destination• Food and lodging during the business portion of the stay If the trip is made primarily for personal reasons, the following arenot deductible, even if some business is conducted at the destination:

• Travel expenses to and from the destination

• The portion of food and lodging not allocable to business

Regardless of the primary purpose of the trip, any expenses incurredat the destination that are properly attributable to employment orbusiness are deductible.

Expenses incurred in attending a convention, including round-triptravel, meals and lodging, tips, and display costs, are deductible if theconvention benefits or advances the interests of the taxpayer’semployment or business.

Armed Forces Reservists

A member of the reserves who travels more than 100 miles away fromhome is eligible to claim travel expenses as an income adjustmentinstead of as an itemized deduction. The amount of expenses is limit-ed to the federal per diem rate for lodging, meals, and incidentalexpenses and to the standard mileage rate for vehicle expenses.Although Form 2106 is required, the expenses are entered directly onForm 1040. Additional information for this procedure is included inthe H&R Block course Advanced Employee Business Expense.

Work as a reservist does not qualify as a temporary assignment.Daily transportation expenses incurred by a taxpayer going betweentheir residence and regular meetings of an armed forces reserve unit(less than 100 miles from home) are nondeductible.

Other possible vehicle deductions for a reservist are:

• Travel expenses, including the cost of round-trip transportation foraway-from-home overnight attendance at a guard or reserve meet-ing

• Transportation between two jobs if the meeting is held on a daythe reservist works another job

• Travel from home to the meeting if the reservist normally workswithin the metropolitan area and the meeting is held at a tempo-rary location outside the metropolitan area

• Transportation from home to the meeting location if the taxpayerhas one or more regular places of work and the meeting location istemporary

Conventions

The travel or transportation expenses of attending a North Americanconvention are deductible if the taxpayer’s attendance has a businessbenefit.

Complete Exercise 2C before continuing to read.


TPS tip: Use the2106 screen toenter expenses ofan armed forces

reservist. Enter Special codeG so that the expenses arecarried to Form 1040,line 24.


QUALIFIED TRANSPORTATION

Transportation expenses are vehicle expenses incurred within thearea of the taxpayer’s tax home. Travel expenses may also generatevehicle expenses; but those expenses are incurred outside the taxpay-er’s tax home. Although tax law differentiates between transporta-tion and travel expenses, the method used to claim them is identical.

Commuting Expenses

No matter how far the distance or how much business is transacteden route, the transportation cost incurred between home and the reg-ular work location is not deductible. These expenses are consideredpersonal commuting expenses.

If your client has no regular office and does not have a home office,the location of their first business contact is considered to be theiroffice, and the mileage to that contact is a commuting expense. Othercontacts made during the day may generate transportation expenses.The distance between the last contact and home is also a commutingexpense.

Travel Between Work Locations

A taxpayer who commutes to a regular work location and then trav-els to other locations for business purposes may incur deductibletransportation expenses.

Transportation between the taxpayer’s home and another work loca-tion is deductible if the taxpayer has an office-in-home as the princi-pal place of business.

Taxpayers who work more than one job in a single day incurdeductible transportation expenses for the travel between job loca-tions. If, for personal reasons, a taxpayer does not go directly from onejob to the other, the deduction is limited to the cost of going directlyfrom one job to the next.

�Example1: Saundra has a full-time job at a coffee shop. During taxseason, she is a part-time Tax Professional. The distance between herwork locations is:

• 12 miles – home to coffee shop

• 5 miles – home to tax office

• 15 miles – coffee shop to tax office

On Mondays, Tuesdays, and Thursdays, Saundra works at the coffeeshop and in the tax office. She often stops at home before going to thetax office. Her deductible expense is limited to 15 miles per day, thedistance from the coffee shop to the tax office.�

�Example 2: A doctor, who is employed by Metro General Hospital,usually sees his patients at the hospital. His transportation expens-es between his home and the hospital are nondeductible commutingexpenses. Occasionally, he is required to examine patients at a localclinic. His daily transportation expenses between the hospital andthe clinic or between his home and the clinic are deductible.�

Remember: If employment at a work location is expected to last, andin fact lasts, for one year or less, the employment is treated as tempo-rary unless facts and circumstances indicate otherwise.

�Example 3: Mike works full-time as a teacher at Penn Valley HighSchool. In July and August, he teaches summer school classes both atPenn Valley and at Holly Hills Middle School. Because summerschool lasts less than a year, Mike can deduct the cost of transporta-tion to the middle school, regardless of whether he goes there fromthe high school or from his home.�

�Example 4: Darcie is a self-employed house painter. Her work takesher to different locations in the metropolitan area in which she lives.Her transportation between her home and her work sites is non-deductible. However, if Darcie has a business purpose to movebetween two or more locations during the day, her transportationbetween work sites is deductible, but her drive from home to the firstwork site and from the last work site back home is non-deductible.�

When a taxpayer’s temporary work locations are outside the metro-politan area of the taxpayer’s tax home, transportation expenses aredeductible. This frequently applies to individuals in construction orservice industries. In Darcie’s case, if any of her work locations areoutside of her tax home metropolitan area, it is possible for her tohave deductible travel expenses.

Metropolitan area is usually defined by the city limits or the limits ofthe metropolitan suburbs. This determination often is a judgmentcall. City limits of rural communities may be relatively close to eachother, while city limits of some metropolitan areas could be in totallydifferent counties. The deciding factor is whether the temporary worklocation is “well beyond the general area” of the taxpayer’s regular



place of living and work. If the location is within an area convenient-ly and frequently visited by the taxpayer, it does not qualify as a tem-porary location. Use the diagram in Illustration 2.1 to help you deter-mine deductible transportation expenses for employees or for self-employed taxpayers whose homes are not their principal place ofbusiness.

Related Issues

In addition to the costs of operating a vehicle or taking public trans-portation, taxpayers may have other transportation-related issues,such as those which follow. Notice that the resolution of several ofthese issues is different for employees than it is for self-employed tax-

Illustration 2.1

payers or for taxpayers claiming their vehicle expense against rentalincome.

Parking and Tolls

Fees paid to park a vehicle at the taxpayer’s place of business arenon-deductible commuting expenses. Likewise, tolls paid while com-muting are not deductible.

Other unreimbursed business-use parking and toll expenses, such asparking fees or tolls paid to visit a client, may be deductible, regard-less of the vehicle expense deduction method claimed.

Interest

Interest paid on a car loan is not deductible for employee businessuse. This differs from the treatment for self-employed individualswho may deduct the business portion of interest paid for a car loan onSchedule C.

Personal Property Tax

To be deductible, personal property tax for a vehicle must be based onthe value of the vehicle and imposed annually. It is deducted onSchedule A, line 7, regardless of employee business use of the vehicle.This differs from self-employed individuals who claim the businessportion of a vehicle’s personal property tax on Schedule C and onlythe remainder on Schedule A.

Car Pools

The driver in a nonprofit car pool may not deduct commuting expens-es. Payments received from riders are not included in income becausethey are considered reimbursements of the driver’s expenses.

Complete Exercise 2D before continuing to read.

INTERVIEWING A CLIENT FOR TRAVEL ANDTRANSPORTATION EXPENSES

We have already discussed that we provide information to our clientsand then they decide how they want to claim their vehicle expenses.How do you determine which trips qualify as travel or transportationexpenses? As you may surmise from the previous pages, these deci-sions are not a matter of client choice. They are determined by apply-ing tax law and interpretation to our clients’ situations.

The first question to ask almost anyone with a tax liability is: Do youever use your own personal vehicle for business?



Your client’s answer to this question is the key to unlocking the wholetopic of vehicles. What kinds of answers could they have?

“Yes, but my employer reimburses me.” Then, you could ask if thereimbursement is at the standard mileage rate.

“Once in awhile.” If your client is self-employed or using the car tomanage rental property, you have found them a potential deduction.If they are an employee, it is time to explain to them the 2%-of-AGIthreshold for employee business expenses deductible on Form 2106.

“I don’t know; I never thought about it.” Now you need to probe withanother question, such as: Does your employer ever ask you to useyour car to make deliveries, pick up supplies, or to attend off-sitetraining?

Once you are satisfied that your client has no deductible vehicleexpenses, you can move on to other topics in your interview.

If your client appears to have deductible vehicle expenses, now is thetime to engage them in a thorough interview to determine their taxhome, commuting mileage, and travel or transportation mileage.

Due Diligence

A thorough interview is only one part of the broader topic of TaxProfessional due diligence.

Two more topics related to Tax Professional due diligence on a returnare: completing a reasonability check and providing an accurate andcomplete return.

If your client states that they have very high mileage in an occupa-tion that seldom has vehicle expenses, you need to ask them abouttheir circumstances. If another client wants to deduct mileage whileworking for an employer who usually reimburses such expenses, theIRS holds you accountable for issues about which you “knew orshould have known.” Sometimes you must ask more questions. If yourclient’s statement supports a deduction, use that deduction and doc-ument your client’s explanation. If your client’s explanation appearsto be counter to tax law, you will have to explain the tax law to yourclient, and it is possible that you may be unable to complete theirreturn. The contemporaneous records requirement of due diligence isthe immediate documentation of your questions and your client’sresponses. The appropriate avenue for H&R Block Tax Professionalsto document this information is in TPS – in the appropriate TPSNotes section.

�Example: Belinda works full-time as an American history teacherat Your City High School. Last summer, she drove to Washington,D.C. to tour the Smithsonian Institution. She wants to claim hermileage as a business expense because she is a teacher and she want-ed to go to the museum to learn more about American history. Youremember something about travel as a form of education not being

deductible. What do you do? You ask more questions and verify yourfacts. In this case, you asked Belinda if her tour was an assignmentfor a course she was taking. She said that it was not a course. Shewent to the Smithsonian on vacation with her family and thoughtthat, because she is a teacher, she could deduct the round-tripmileage there from her home. You then advise her that, based on thefacts she has presented, her mileage for this vacation is personalmileage, not an employee business expense that is acceptable to theIRS. She may not include this mileage on her tax return. If Belindagives you mileage for other trips which were made for her employ-ment and you suspect that she may have tucked the mileage for hervacation into this mileage, you may need to document in PreparerNotes the explanation you gave her on which miles are deductible.�

Preparer due diligence also requires that you know or research atopic before you deal with that topic on your client’s return. You havean ethical obligation to complete every tax return accurately andcompletely. This attempt is made regardless of how much tax law youhave studied or how reluctant your client is to provide accurate andcomplete information. Let’s look back at the example of Belinda, thehistory teacher. A Tax Professional who knows nothing about tax lawrelated to employee business expenses and who is unwilling toresearch the topic cannot ethically prepare Belinda’s return if it con-tains employee business expenses.

OTHER TPS ENTRIES

TPS deals with one vehicle used in more than one business and alsowith more than one vehicle used in a single business.

More Than One Vehicle

Reporting requirements require that vehicle expenses are reportedby vehicle. A taxpayer may not combine business-use mileage for twoor more vehicles, even if the standard mileage rate method is used.

More Than One Business

Whenever an additional trade or business activity is added to yourclient’s return and this activity has vehicle expenses, TPS asks you ifyou want to use the same vehicle for expenses for this additionalactivity. If the same vehicle is used, the only additional entry is themileage for the additional activity. TPS carries the same total mileageto the reporting forms for both activities and reports the correspon-ding business deduction on each activity.

�Example: Josh uses his car for employee business purposes and alsofor his Schedule E rental activity. Josh reports the same total milesboth on Form 2106 and on the Schedule E mileage worksheet. His



business miles as an employee are entered on Form 2106, and hisrental activity miles are entered on Schedule E.�

�Example: Gaston and his wife both use the same vehicle as part oftheir employee business expenses. Gaston reports his use of the vehi-cle on his Form 2106, and his wife reports her use of the same vehi-cle on her Form 2106. They each claim only their own business-usemileage, but the total miles the vehicle was driven during the year isthe same for both of them.�

SUMMARY

Knowing how to talk to you clients about their vehicle expenses andknowing how to enter their expenses into TPS serves your clients welland helps you build your business. Your expertise in determiningwhich vehicle expenses are deductible protects your clients. And yourvigilance in finding all of their deductible vehicle expenses supportsthe H&R Block maximum refund guarantee.

As we learned in Chapter 1, taxpayers who use their own personalvehicles in their trades or businesses have two choices for computingthe deductible expense:

• The standard mileage rate

• Actual vehicle expenses

For either method, the taxpayer (or spouse if married filing jointly)must own or lease the vehicle. Along with the actual vehicle expens-es method comes the whole range of possibilities using methods ofdepreciation, bonus depreciation, and the §179 expense deduction.

Now you are ready to combine your knowledge of tax law and TPSentry with your skilled interview technique to customize the adviceyou give to your clients.

At the intermediate level, you know how to deduct vehicle expenseson an individual income tax return. If you have clients who use theirvehicles for business and are interested in this topic, you may wish tolearn about trading vehicles and leasing vehicles. Both of these top-ics are covered in the H&R Block course, Advanced EmployeeBusiness Expense. Finally, to learn how to report taxable income dueto recapture of accelerated depreciation, see Advanced Disposition ofBusiness Assets.

2Travel and Transportation

EXERCISE 2A

At the end of the first session, your instructor encouraged you to experimentwith researching topics through The Tax Institute. Some of you may neverhave done this before and some may have had difficulty doing so. Here aresteps to find and to use this resource:

1. Most H&R Block Tax Professionals have access to myBlockSM for the TaxOffice (MBTO) at the following address.

2. QuickLinks lists in alphabetical order sites often used by TaxProfessionals. Click on Tax Research-Tax Institute.

W2.1

3. For our training purposes, we will always search for information in docu-ments which have already been published by The Tax Institute. If, afteryou have searched the database, you still have a question about a real-lifesituation, you may ask a researcher to answer your question. For ourcourse, please do not ask a researcher at The Tax Institute to do researchfor you! We reserve this procedure to answer questions for bona fide taxclients.

Enter a few key words in the field under “Start A New Search”, and thenclick on Go. With practice, you will learn to enter precise key words relat-ed to the information you need.

4. You may be asking yourself, why are we doing this now? Don’t the taxtraining writers want to write books anymore?

We want to provide training to make you successful in the office.Sometimes you will be more successful if you can find a solution to yourclient’s problem right there at the tax desk. We want you to have the bestaccess to additional tax law information when you need it as you interviewyour client. From the TPS desktop, you can click on Help and then accessthe Knowledge Base by clicking on The Tax Institute – Tax Research.The information accessed here is written in a concise and thorough man-ner, and it is viewable both for Tax Professionals and for clients.

Now it’s time for you to practice.


Travel and Transportation W2.3

5. Suppose your client bought a new heavy SUV, used it 80% for business, andneeded to shelter some income he hadn’t expected. If this client wasn’t sureyou were correct when you told him he could claim $25,000 §179 expensededuction, how could you use the Tax Research Knowledge Base to showhim this benefit is available to him?

List the key words you searched and the titles of the articles you found.

6. Your client needs to buy new furniture for her rental property. She was sur-prised to get such a nice deduction for one small item she put into servicein 2009 and wants to buy even more in 2010. She budgets her expensescarefully and asks you if you are sure that bonus depreciation will still beavailable in 2010. How could you use the Tax Research Knowledge Base toanswer her question?

List the key words you searched and the titles of the articles you found.

EXERCISE 2B

What is the tax home for the following taxpayers?

1. Gabe’s family has always lived in Miami. His wife and children livethere, and Gabe spends all his vacation time and one weekend amonth with them in their family home. Gabe is a scientist who worksin a laboratory on the outskirts of Chicago. He travels regularly andoften makes impromptu stops in Miami on his way to conferences inEurope and Central and South America. He votes in Miami, attendscommunity events there, and lives in an extended stay hotel whenhe is in Chicago.

2. Frannie lives with her mom in northern Wisconsin. She begins theyear working there in a store near a popular snowmobilers’ resortand remains throughout the summer fishing season. Then inOctober she travels to Florida to work at a Christmas tree lot. InDecember, she goes back home and the cycle repeats. She earnsabout $12,000 in the 10 months she works in Wisconsin and $4,000in the 5 weeks she works in Florida.

3. Howard lives in Seattle and telecommutes to his job in Los Angeles.

4. Santini is a skilled construction worker out to see the world. He lefthis regular job in his hometown and has only gone back twice to visitrelatives. Since then, he works for awhile at one construction site,and then in a few months, he moves on to another area. He alwaysgives his employers his mother’s address and uses it to file his taxreturns. This year, he had seven employers in five states.

Solution 2B

The tax homes are as follows:

1. Gabe’s tax home is his regular place of business, the outskirts ofChicago.

2. Frannie’s tax home is in northern Wisconsin, where her main placeof business is located.

3. Howard’s tax home is Seattle, the place where he regularly livessince he has no place of business.

4. Santini had no tax home because he has no regular or main place ofbusiness and no place he regularly lives. He is an itinerant worker.

Now continue reading in your text.

EXERCISE 2C

Your local Pizza Oven has expanded recently and hired three new managers.Your family loves pizza and has been checking out the three new Pizza Ovenlocations. As part of your Will to Win plan, you pass out your business cardto the manager of eating establishments in which you dine. In your “elevatorspeech,” designed to win new clients, you compliment the manager on howwell-run their restaurant is and state that they must really be an expert atmanaging such a busy place. Then you mention that you are an expert in



taxes, especially moving expenses and employee business expenses, and giveout your card.

All three managers subsequently asked you to complete their 2009 incometax returns. Based on their stories, which ones have deductible vehicleexpenses for travel?

1. Ahmad had already been working as a manager at another areaPizza Oven. He worked at the new location from November 2008until September 2009. Then he returned to his former location.

2. Regina just completed her formal education at Other CityUniversity, obtaining a BA in business administration. To supportherself through college, she worked in the campus food service. Sheis considered to be a Pizza Oven trainee, working in a 90-day proba-tion period. If her work is satisfactory, her job will become perma-nent.

3. Belinda is single and likes to travel. She worked in Aspen fromNovember 2007 until May 2008. Then she moved on to Los Angelesand supported herself as a self-employed masseuse. When she sawthe ad for the Pizza Oven manager position, she applied and movedto Your City in March 2009. The job didn’t work out, and she was letgo in November 2009. She likes Your City and wants to stay in town.Now she is working as a personal trainer.

Solution 2C

1. Ahmad is on temporary assignment. He may deduct the cost of his dailyround-trip transportation. (He could also deduct other living expenses ifthe distance from his tax home to the new Pizza Oven restaurant is toogreat for him to return home at the end of each day’s work. More detail onhis other potential expenses are covered in the Advanced EmployeeBusiness Expense course.)

2. Regina is working on an indefinite assignment. The expenses she incurstraveling between her home and her employment are nondeductible com-muting expenses.

3. Belinda was working on an indefinite assignment. She has no travelexpenses to deduct.

EXERCISE 2D

1. What is the deductible transportation mileage for Maritza who worked forH&R Block at the district office? She wanted to work more hours and vol-unteered to be a “floater,” working at other offices on days when she wasnot scheduled to work. She lives 7 miles from the district office and workedthere 50 days during tax season. She also worked 3 days at an office 4 milesfrom her home and 10 days at an office 12 miles from her home.

2. What is the deductible transportation mileage for one day’s work for Clintwho is a traveling home health nurse? He phones his employer in theevening to get his patient appointment list for his next day’s work. After headministers the treatment to each patient, he completes the paperwork forthat patient and then moves on to the next patient. He travels to hisemployer’s place of business once or twice a month to pick up supplies andto exchange information with them. He does not have a portion of his homethat qualifies as a home office.

Home to first patient 5 miles

First to second patient 3 miles

Second to third patent 10 miles

Third to fourth patient 2 miles

Fourth to fifth patient 4 miles

Fifth patient to home 6 miles



Clint complains that he has a hard time keeping track of his mileage. Doyou have any suggestions for him?

(See page W2.14 for the solution.)

TPS CLASS EXERCISE 2A

Hope Accord’s return has been prepared for you as a shell return, accessedby entering 828-01-1026 in Case Studies mode. New SSN__________________

Step 1. Use the following information to enter Hope’s vehicle expenses, just as theywere entered by your instructor in the Chapter 1 class demonstration. OnAugust 10, 2009, Hope Accord began using her 2008 Honda, her only vehi-cle, for employee business purposes. Her basis for depreciation for thisvehicle is $14,200. She drove her car 12,975 total miles. Of this mileage,3,310 miles were business miles. Her average daily commute was 15 milesround-trip and she worked 210 days in the year. She keeps a log book torecord the amount and purpose of miles she puts on her car for business.Check your work against the Form 2106EZ shown on page 1.3 in your text-book.

Step 2. During the interview, you find out that Hope put a rental house into serv-ice in October and traveled 2,150 miles in her Honda as part of the rentalactivity. Use the first screen shot, Accord tip 1, on page W2.8 to set upHope’s rental activity on Schedule E. Notice that she received $1,000 rentin 2009. Enter Y at line 6, and enter her vehicle expenses for the Honda forher rental activity.

Since the entries you made for total mileage and cost or other adjustedbasis for the vehicle do not change, you will now add on only the new infor-mation for the rental activity. To do do so, enter Y to add to your existingworksheet as shown in Accord tip 2.

Only one new entry, business mileage, needs to be made for the rental busi-ness-use of the Accord. See Accord tip 3.

Accord tip 4 shows the E-1 screen after the vehicle expense has been com-puted. To make the problem more realistic, other rental expenses havebeen entered. Put these expenses on your Hope Accord return.

Moving along to Accord tip 5, enter Y on line 20 to access the depreciationscreens for Hope’s rental activity.

Be sure to use Alt L to determine the correct entries for each field, and F1Help whenever you are unsure of the next entry. Accord tip 6 begins depre-ciation. As soon as you enter R for Residential Real Estate, the computercarries you to the pop-up screen shown in Accord tip 7.


Accord tip 1

Accord tip 2


Accord tip 3

Accord tip 4

Accord tip 5


Accord tip 6

Accord tip 7


The TPS Summary screen, shown below in Accord tip 8, is a check-point foryour work so far.

Accord tip 8

Step 3. Once your return matches Accord tip 8, add the following: On November28, 2009, Hope purchased a truck so that she could carry ladders and otheritems to and from the new rental property. She put 625 miles on her lighttruck (under 6,000 pounds) for her rental activity. She has 1,020 total mileson her new truck.

What are your thoughts for tax planning for Hope after she reveals to youthat she bought a new truck? Write a statement you can use to explain toHope how she could claim her truck expenses and the tax effect of doing so.

Notes:



Step 4. Remember from Step 3 that Hope has 1,020 total miles on her new truckand 625 business miles. She purchased the light truck on November 28,2009. Her basis for depreciation is $34,950. Hope also documented the fol-lowing truck expenses in 2009:

Gas $225License 350Insurance 1,200

The completed return using the standard mileage rate for both vehicles iscopied for your convenience on pages W2.15–W2.24.

Look at the Transportation and Travel for Schedules C, E, and F worksheetto determine her 2009 deduction for the light truck if she uses the standardmileage rate. Does your answer match that shown on page W2.23? Once yourreturn agrees, think about one more issue:

Hope is legally entitled to claim her truck expenses using the actualexpense method, including bonus depreciation. However, in future years,if the business use of her truck is less than 50% of her total usage, shewill be subject to recapture of accelerated depreciation. This means shewould have extra taxable income to report on her income tax return forthat year.

Pages W2.25–W2.26 show the Form 1040 for Hope’s return using the actualexpense method for the truck. Using the actual expense method, Hope’srefund is $2,755. Using the standard mileage rate, it is $1,608.

Note: If Hope claims the actual expense method, it would be wise for her TaxProfessional to document the information given to her about the tax conse-quences of 50% or less business use of the truck in future years.

TPS CLASS EXERCISE 2B

Work with a partner to complete this final return. One person is the TaxProfessional and the other is Stuart Brinkley, a chemical engineer whoworks near his alma mater. He decided to start his own limo service,Moonlight Madness. He paid $58,000 for a 2005 modified stretch HummerH2, which he bought and placed into service on March 2, 2009. The 16-pas-senger vehicle has bench seating behind a mirrored divider wall that sepa-rates the driver from the passengers. It also has a mirrored fiber optic ceil-ing, and two well-supplied mirrored fiber optic bars. He has paid $3,250interest on the note he took out for the limo. So far, he has always been thedriver. But, depending on advice you give him for next year, he may hire adriver for at least some of the work.

His wages and Schedule C income have been entered into a shell returnaccessed at 828-02-6097.

New SSN ______________________

This assignment it not about data entry—it is about interview and advice.You may use your imagination as you complete the following exercises:

1. Based on your interview, enter depreciation for the Hummer.

2. Conduct a thorough Schedule C interview, covering his mileage and vehi-cle expenses as well as other and business expenses and the documenta-tion requirements for the expenses he claims.

3. Get feedback on your interview from your partner who played the role ofStuart.

4. The two of you together can then brainstorm on advice you can give Stuartfor the coming year.

5. Jot down highlights of your experience to share with the entire class.

Solution 2D

Deductible mileage is:

1. 264 miles. [(8 � 3 = 24 miles for the days at the office 4 miles from herhome) + (24 � 10 = 240 miles for the days at the office 12 miles from herhome)]

2. 19 miles [3 + 10 + 2 + 4 = 19]

Clint needs to keep a record of his vehicle’s mileage at the beginning andend of the year. He also needs to keep a log of the dates, purpose, and milestraveled for business use and miles traveled for commuting. As long as heworks continuously and does not use his vehicle for personal purposes dur-ing the day, he does not need to keep track of the distance between eachpatient. Maybe it would be easier for him to record commuting mileageseparately and then to record his mileage at his first stop of the day and athis last stop of the day. This would allow him to record his business mileageper day without making so many separate entries.


$25,000 limit, 1.16§179 deduction, 1.2, 1.4, 1.14, 1.16200% declining balance, 1.1450% business use, 1.8, 1.12, 1.14

A

Actual vehicle expense, 1.2, 1.6, 1.19ADS recovery period, 1.8Armed Forces Reservist, 2.6

B

Basis, 1.6Bonus depreciation, 1.2, 1.4, 1.12, 1.14

C

Cap, 1.15Car, 1.6Car pool, 2.10Commuting expenses, 2.7Conventions, 2.6Cost recovery, 1.6

D

Depreciation, 1.6, 1.14Documentation, 1.4, 1.18Domicile, 2.2Due diligence, 2.11

E

Emergency vehicle, 1.6

F

Fair market value, 1.14Fleet of vehicles, 1.2Form

2106EZ, 1.24562, 1.16

G

Gross vehicle weight (GVW), 1.16GVW, 1.6

H

Heavy vehicle, 1.16

I

Indefinite assignment, 2.4Interest, 2.10

L

Lease, 1.2, 1.6, 1.16Light truck, 1.14, 1.16Limits, 1.10Limousine, 1.6Listed property, 1.6, 1.16Living expenses, 2.1Local transportation, 1.10Lodging, 2.4

M

MACRS, 1.14Main home, 2.3Married filing jointly, 1.2MBTO, 1.4Meals, 2.4Metropolitan area, 2.8Military, 2.6

N

Nonpersonal-use vehicle, 1.6, 1.16

O

Operating expense, 1.11, 1.12

P

Panel truck, 1.2Parking and tolls, 1.10, 2.10Personal property tax, 2.10Pickup truck, 1.2Primary residence, 2.3Principal place of business, 2.1, 2.7Property tax, 1.13

Index

I.1

R

Regular place of business, 2.2Reimbursement, 1.2Rural mail carrier, 1.2

S

Sales tax, 1.6Schedule

A, 2.10C, 1.8, 1.13, 2.10

Self-employed, 1.13Short-term worker, 2.2Smaller vehicles, 1.14Standard mileage rate, 1.2, 1.10, 1.13, 1.19Straight-line depreciation, 1.8SUV, 1.6, 1.10, 1.14, 1.16

T

Tax home, 2.1, 2.2, 2.3, 2.4, 2.7Tax planning, 1.18

Taxi, 1.2, 1.6Temporary lodging, 2.3Temporary work assignment, 2.3TPS entry, 1.8trade, 1.2Trade or business, 1.1Transportation, 2.7Travel, 2.3Travel between work locations, 2.7Travel expenses, 2.5, 2.6Travel within the U.S., 2.5

V

Van, 1.2, 1.14, 1.16Vehicle, 1.2Vehicle depreciation limits, 1.14

W

Weekends, 2.4Written evidence, 1.10

I.2 H&R Block Intermediate Vehicle Expense (2010)

intermediate vehicle expense

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