Depreciation of delivery truck and use of mileage?

Question

On October 1, 2005, I bought a business which included a used delivery truck being used exclusively for my business. The used delivery truck was estimated to be $6K. I am trying to finish up 2005 tax return (Schedule c) which was extended. Here is my question on deducting the use of the truck.

I can take section 179 in 2005 and expense entire 6K, right? In that case, I guess I can not use mileage deductions any more beginning 2006.
Or I can use mileage deduction for 2005 and continue to use the mileage method.
But I found some where that if I depreciate my truck the first year using straight line method, I can use mileage method for 2005 and there after as well. What do you think is the best solution?
For your information, my mileage per month is about 1,000 miles. Thank you so much.

Answer 1

You can take the 179 if the vehicle is new to you. However, the bigger question is, should you take the STANDARD mileage or the ACTUAL expenses. The answer isn't straight forward.

If you take the ACTUAL expenses in the first year, you must take ACTUAL expenses for the remainder of the years you use that specific vehicle for your business. It allows you to depreciate the vehicle either in the first year (section 179), or using MACRS. In addition, you can write-off gas, oil, washes, repairs, and insurance.

If you take STANDARD the first year, you have the option of choosing STANDARD or ACTUAL in subsequent years (whichever is better for you). If, in subsequent years, choose ACTUAL, the depreciation part of it is strictly straight-line AND you have to take into consideration how much the vehicle was already depreciated because even when you claim STANDARD, part of the STANDARD mileage is depreciation. The math gets real funky and I would avoid it like the plague. Eventually, you will depreciated the vehicle to zero and won't be able to depreciate it anymore during ACTUAL years but you will during STANDARD years because the depreciation is already in the mileage amount. Theoretically, you get credit for depreciation even after the vehicle has been depreciated to zero with STANDARD.

Here is what I tell my clients. If the vehicle is used (or fairly inexpensive), and you are planning on driving lots of miles, and you plan on using it for a long time, and it gets fairly good gas mileage, take the STANDARD deduction. If it is relatively expensive, and you don't plan on keeping it too long, and it gets bad mileage or is prone to repair, or you REALLY need the write-off in year one, then take the ACTUAL. Keep in mind the ACTUAL requires more paperwork considering you must keep track of all receipts. STANDARD only requires you to keep track of mileage.

Hope this helps :)

Answer 2

You can elect Sec. 179. However, unless the gross loaded weight is 6000 pounds or more, the 179 deduction is limited to the amount you could otherwise claim using accelerated depreciation.

If you elect Sec. 179 or MACRS (accelerated) 5 year depreciation, you can still claim your actual operating costs (gas, oil, repairs, insurance, etc.).

The mileage allowance incorporates both the depreciation and operating costs. So, you may only deduct the allowance. Don't try to do that and also claim either depreciation or operating costs.

The answer to your question requires some "what if" work on your part. Look at your income for 2005 and thereafter. Also consider the estimated life of the truck. Then calculate the tax results if you a) take Sec. 179 and actual expenses; b) take MACRS depreciation and actual expenses; or, c) use the standard mileage allowance.

Generally, you'll get a better result accelerating deductions, and actual operating expenses are usually greater than allowed in the mileage allowance. My advice is take the Sec. 179 deduction if you top 6000 pounds and have decent income in 2005. Otherwise, use the MACRS depreciation allowance. Either way, you also claim the actual operating expenses.

The mileage allowance works best when you anticipate a long life for the truck. It is possible in that circumstance that over several years the depreciation component of the allowance will actually exceed the cost of the truck.

Answer 3

The major advantage of the standard mileage rate is that it requires very little in the way of record keeping. It is rare that someone is better off with the actual expense method. I would use the standard mileage.