CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2005 CCH Whole Ball of Tax is available in print. Please contact:
 
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
 
Neil Allen
(847) 267-2179
allenn@cch.com

Link to special CCH Tax Briefings on key topics from 2004:
 

• American Jobs Creation Act
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• Working Families Tax Relief Act
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Taxing Transportation Issues:
Keeping up with Rules Relating to Car Expenses

(RIVERWOODS, ILL., January 2005) – Understanding the tax treatment of car-related expenses can be as frustrating to taxpayers as being stuck in a traffic jam, according to CCH INCORPORATED (CCH), a leading provider of tax and accounting information, software and services (tax.cchgroup.com). Car expenses are common deductions, especially for businesses, but the complex nature of the Internal Revenue Code and ever-changing IRS rules and regulations – including some changes late in 2004 – mean that more than ever, individual taxpayers need to keep a close eye on this area to ensure they drive the maximum tax benefit.

Personal Expenses

Generally speaking, the expenses of operating a car for personal purposes are not deductible. However, even if a car is used entirely for personal purposes, all or a portion of the certain expenses may be deducted as itemized deductions.

• Interest: Interest on a car loan is generally not deductible. Interest is deductible, however, on home equity loans, within limits, so it may make sense from a tax-planning standpoint to finance a car with a home equity loan rather than with a traditional car loan.

• State and local property tax and sales tax: State or local personal property taxes based on the value of a car are deductible, and car registration fees based on value may be deductible if they qualify as personal property taxes in the taxpayer’s state. Also, thanks to the American Jobs Creation Act of 2004 (AJCA), taxpayers now have the option to claim state and local general sales taxes instead of state and local income taxes when they itemize deductions. This option is available for the 2004 and 2005 returns.

• Charitable use: Taxpayers who use a car in connection with the performance of volunteer work for a charitable organization may claim a charitable deduction based on out-of-pocket expenses, including parking and tolls, or a standard mileage allowance of 14 cents per mile for 2004.

• Moving expenses: Individuals who move in connection with the start of work at a new location are entitled to deduct the expense of driving to the new location. A taxpayer can deduct either the actual expense incurred, or the standard rate of 14 cents per mile for 2004 (scheduled to increase to 15 cents in 2005).

• Medical expenses: The cost of traveling to and from a doctor, dentist, hospital or pharmacy is a deductible medical expense. The deduction is computed at 14 cents per mile for 2004 (increasing to 15 cents in 2005).

• Casualty or theft loss: A deduction can also be taken on the loss of a car due to accident, fire or theft. The amount of a loss that may be deductible is limited to the excess of such loss (reduced by $100 for each casualty) over 10 percent of the taxpayer’s adjusted gross income. If the car is covered by insurance, only the portion of the loss that is not reimbursed can be used in claiming the deduction.

As Charitable Contributions of Cars Accelerate, IRS and Congress Act

"The growing popularity of the charitable donations of cars by individual taxpayers in recent years and concern by the IRS over the excessive valuation of donated cars has resulted in increased attention from the IRS and Congress in this area," notes John W. Roth, JD, CCH federal tax law analyst.

In 2004, the IRS issued a special publication for taxpayers dealing with car donations to help taxpayers avoid potential pitfalls (Publication 4303, A Donor's Guide to Car Donations, which is valid for cars donated before January 1, 2005). Congress also acted last year and under the American Jobs Creation Act of 2004, altered the rules for the contributions of used motor vehicles after December 31, 2004.

Under the new law, for the 2004 tax year, taxpayers can still deduct the fair market value of their old car or truck. Going forward, however, the amount of the deduction will depend on how the donee organization uses that vehicle. If the charity sells the vehicle without using it in any significant way (or improving it significantly), the amount of the charitable deduction cannot exceed the gross proceeds from the sale. The taxpayer also must produce a written acknowledgement from the charity if the charity keeps the vehicle for its own use.

While the new rule applied to donations in 2005 and beyond, taxpayers who have inflated deductions in past years are not home free. They are still required to substantiate the value of the vehicle donation on an audit of a return for any open year.

It Pays to Conserve

There are two energy conservation incentives that have a favorable effect on taxpayers: the deduction for clean-fuel vehicles and the tax credit for electric vehicles. To encourage the use of vehicles powered by cleaner burning fuel, a deduction from gross income is permitted for a portion of the cost of certain "clean fuel" vehicles placed in service after June 30, 1993, and before January 1, 2007.

For individual taxpayers, the original purchaser of a qualifying hybrid gas-electric car can deduct up to $2,000 for the first year in which the vehicle is used, and they must use Form 1040 to claim the deduction.

As a result of changes enacted under the Working Families Tax Relief Act of 2004 (WFTRA), the deduction is up to $2,000 for certified vehicles first put into service in 2004 and 2005. In 2006, the maximum deduction is scheduled to drop to $500 and no deduction will be allowed after that year.

Taxpayers also can benefit from a tax credit for electric vehicles. Generally, the credit, which can be taken for the first year in which the vehicle is in use, is 10 percent of the cost of a vehicle powered primarily by an electric motor placed in service after June 30, 1993, and before January 1, 2007. The maximum credit is $4,000, and although the credit was scheduled to phase out through 2006, WFTRA repealed the credit phase-out for property acquired in 2004 and 2005.

Car-related Business Issues

Employees and self-employed individuals are entitled to certain tax deductions for expenses incurred in connection with their cars. These deductions fall into four main categories of expenses: business; investment-related; reimbursed; and personal. When an employer provides a car to an employee that is available for the employee’s personal use, the value of that availability is generally considered to be a taxable fringe benefit.

• Business expenses: Expenses incurred for a car that is used in an individual’s business are generally allowed as deductions from gross income. However, expenses incurred by an individual as an employee are usually only deductible as miscellaneous itemized deductions. The optional standard mileage rate for 2004 to be used in computing the deductible costs of operating an automobile for business is 37.5 cents per mile, which was increased to 40.5 cents per mile for 2005.

• Investment expenses: Expenses incurred for a car that is used in connection with an individual’s investments are generally treated as miscellaneous itemized deductions, subject to a 2-percent-of-adjusted-gross-income floor.

• Reimbursed expenses: Expenses incurred for a car that is used in an individual’s employment are disregarded if reimbursed by the employer under an accountable plan. In this case, neither the reimbursement nor the expense is reported. Reimbursements for car expenses received under a nonaccountable plan are treated as taxable wages, and an employee who is reimbursed under a nonaccountable plan must claim allowable car expenses as a miscellaneous itemized deduction, subject to a 2-percent-of-gross-income floor.

A change affecting the maximum deduction businesses can take for certain sports utility vehicles (SUVs) sent some business owners scrambling to their car dealers late in 2004. Under a new provision passed as part of the American Jobs Creation Act, the large SUVs will no longer be able to be driven through a large tax loophole. Because the vehicle caps on depreciation previously did not apply to cars or trucks weighing more than 6,000 pounds, taxpayers could deduct up to the full cost of the SUV immediately as a section 179 deduction. Under the new provision, the first-year deduction is capped at $25,000 for most heavy SUVs placed in service after October 22, 2004. Through the end of 2004, up to 50 percent first-year bonus depreciation was still available for these vehicles.

With the expiration of bonus depreciation on December 31, 2004, however, heavy SUVs purchased in 2005 will be limited to first-year write-offs of the $25,000 expense cap plus regular depreciation. This is still better than the first-year depreciation limits applicable to cars weighing 6,000 pounds or less, which for 2005 are likely to have total first-year depreciations capped at around $3,000.

About CCH INCORPORATED

CCH INCORPORATED (tax.cchgroup.com), based in Riverwoods, Ill., is a leading provider of tax and accounting information, software and services. CCH has served tax, accounting and business professionals and their clients since 1913, providing them with the most authoritative, timely and comprehensive tax resources. CCH is a Wolters Kluwer company (www.wolterskluwer.com).

Wolters Kluwer is a leading multinational publisher and information services company. The company’s core markets are spread across the health, tax, accounting, corporate, financial services, legal and regulatory, and education sectors. Wolters Kluwer has annual revenues (2003) of €3.4 billion, employs approximately 18,750 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.

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nb-05-23