Rules on Use of Car for Business
QUESTION: My employer requires me to drive my own car on job-related trips, so I take auto deductions on my tax return. There were so many different things reported last year about new IRS rules on car expenses that I’m totally confused about what the rules for 1986 are. Do you know?--L. A. A.
ANSWER: The most important thing for you to keep in mind, both for 1986 car expenses and for your 1985 tax return, is that you now have to tell the IRS whether you have evidence to prove your business use of a vehicle and whether that evidence is in writing.
Other than that, the requirements are pretty much the same as in the past. You must provide the IRS with information on when the car was placed in service--that is, when you started using it for business purposes, the number of miles you drove it and a breakdown of how many of those miles were for business and how many for pleasure or commuting. As before, the IRS doesn’t permit taxpayers to deduct commuting expenses.
Also under the regulations for tax years beginning with 1985, your employer isn’t required to include this information on his return if he provides more than five vehicles for employees’ use.
For those taxpayers who have the use of their employer’s vehicle for commuting to and from work, that is now regarded as a fringe benefit and is taxed accordingly. Assuming this commuting arrangement is for business reasons and the vehicle is used strictly for business, the value of that benefit is deemed to be $3 a day for a round trip.
Only certain high-level employees and large shareholders of the company providing the car are exempt from that requirement. For 1985, the exemption applies to company officers and those who own 5% or more of the stock. For 1986, so-called control employees are exempt. These are company officers elected or confirmed by the firm’s board of directors or by its shareholders, company directors and anyone with an interest of 1% or more in the equity, capital or profits of the company.
Q: I plan to check the box on my state tax return that authorizes part of my state tax refund to be sent to a charity. That raises a question regarding my federal tax return. Which figure do I report on my federal return as my state tax refund--the amount I actually received or the amount before the contribution is subtracted?--W. F.
A: Even though you actually receive less from the state, you have to report as income to the IRS (that is, assuming you itemize your deductions) the full amount of the refund, including the charitable deduction.
However, any taxpayer who checks the state-return box to designate money to charity or any other special fund so noted on the state return is entitled to deduct that amount from their federal taxes. The IRS recently confirmed that position in a letter ruling to a taxpayer.
