"Everyone's Oil Depletion Allowance" Makes Fuel Efficient Cars a Tax Free Profit Center
by Craig A. Severance
July 1, 2011
As a CPA, I was amazed the first time I encountered information on the Oil Depletion Allowance -- a special tax break for certain businesses with an interest in oil and gas operations. My amazement came because it is customary for Congress to grant tax write-offs when a taxpayer actually spends money on something real. However, the Oil Depletion Allowance is often a straight 15% deduction off Gross Revenues -- without the need to spend a single dime.
The rest of us would love to have such a "standard" tax write-off with no need to actually spend money, but they are very rare.
"Everyone's Oil Depletion Allowance". While not as generous as the tax breaks for the oil and gas industry, there is a "standard" tax write-off available to most businesses that, like the Oil Depletion Allowance, is not based upon the amount of money you actually spend. This "standard" write-off is the Standard Mileage Rate -- which on July 1, 2011 the IRS increased from 51 cents, to a new rate of 55 1/2 cents for every mile driven for business.
The Standard Mileage Rate is based upon IRS calculations of what -- on average -- it costs to own and run a vehicle. Burning fuel, i.e. depleting the oil based resource in your tank, is a big part of that cost, which is why my nickname for the Standard Mileage Rate is "Everyone's Oil Depletion Allowance".
Opportunity for Small Business Owners With Fuel Efficient Vehicles. The other reason this nickname fits is that a business can use the full amount of this tax write-off without actually spending that much money. The Standard Mileage Rate is based on miles driven -- not how much it actually costs to drive those miles.
Because it is an average rate, small businesses with fuel efficient vehicles can use this as a perfectly legitimate way to claim a business deduction that is more than they actually had to spend. They just need to make sure they are eligible to use the Standard Mileage Rate per IRS rules, and keep good mileage records.
When Do You Really Need the Big Truck? Many businesses -- including many who do not now think they could use a lighter vehicle -- can benefit from this strategy. How often is a heavy truck really needed? Are you really going to haul a backhoe around on a bidding sales call or a quick trip to the hardware store? If you really must have a heavy truck, limit its use to only the trips where it is really needed.
Opportunities for Employees. IRS currently limits the use of the Standard Mileage Rate essentially to small businesses, those with up to 4 vehicles in use, and does not permit its use for large fleets of vehicles such as those owned by big corporations. However, it is standard practice in many large and small corporations to reimburse employees (tax free) at the Standard Mileage Rate for using their own vehicles for the business.
The employee, therefore, can receive tax free income. If they are getting reimbursed 55 1/2 cents per mile for driving an efficient car on company business, they can get paid more than it costs them to drive that vehicle. This is a great way to be rewarded for driving a "Green" car.
I typically advise small corporation owners, who are employees, to use this "employee reimbursement" method for themselves as well rather than have their corporation own the vehicle. This is because Congress treats light-weight vehicles as "Luxury Automobiles" (go figure), with strict limits on write-offs that do not apply to heavy gas guzzler vehicles. The Standard Mileage Rate employee reimbursement for use of a personally-owned vehicle is often thus the only way for a small corporation owner to be patriotic and save on imported oil.
Substantial Tax Free Profits. Let's take a quick look at how well this can work, assuming a pretty typical business use of 18,000 business miles per year for an active business person. Reimbursed at the new 55 1/2 cents per mile Standard Mileage Rate, that's $9,990 per year of tax write-off if you are the business owner, or $9,990/year in reimbursement to you if you are the employee.
To drive a Toyota Prius 18,000 miles per year would only use about 360 gallons of gasoline. I know since I own one, and if you get less than 50 mpg you've got a "lead foot". At $4 per gallon that gasoline would only cost you $1,440 -- so you are still $8,550/year ahead of the game.
You still have to pay for the car. Let's say you expect the car to last 120,000 miles before it would be sold for an old Prius value of, say, $5,000. (Yeah, used fuel-efficient cars are worth more these days.) If you paid $25,000 for the car new, that's equivalent to burning through about 17 cents of the cost of the car for every mile you drive, or only about $3,000/year for the business miles portion driven each year. So you're still $5,550/year ahead of the game.
If you need to spend anywhere near $5,550/year to register, maintain, insure and repair a brand new car, there's something very wrong -- so it's clear that getting paid tax free 55 1/2 cents per mile to drive a Prius is a great deal. If you did this for five years and only cleared $2,000/year you would have tax free income of $10,000 over that period, for a nice down-payment on your next car.
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What Will it Take to End Our Oil Addiction?
Deepwater Horizon Oil Spill Peak Oil Coming Sooner Than Expected
May 29, 2010
by Craig Severance
It's time we moved on to something else, or this is going to kill us.
Not only are world oil supplies running out, but what oil is still left is proving very dirty to obtain. We need to kick our oil addiction now if we expect to preserve any hopes of economic prosperity, or unspoiled habitats.
"This is What the End of the Oil Age Looks Like." We have the Deepwater Horizon oil spill now precisely because the easy to obtain oil is already tapped. You don't drill in mile deep waters if you have somewhere else you could go.
The worst is yet to come. If we don't kick oil now, we will see more disasters as oil companies move to the Arctic offshore, clear more forests for tar sands, and rape the American West to develop oil shale. Worldwide droughts, floods and dead seas will also ensue from global warming caused from burning oil.
Richard Heinberg of Post Carbon Institute said it best: "This is what the end of the oil age looks like. The cheap, easy petroleum is gone; from now on, we will pay steadily more and more for what we put in our gas tanks—more not just in dollars, but in lives and health, in a failed foreign policy that spawns foreign wars and military occupations, and in the lost integrity of the biological systems that sustain life on this planet. The only solution is to do proactively, and sooner, what we will end up doing anyway as a result of resource depletion and economic, environmental, and military ruin: end our dependence on the stuff."
We Can Do That. I said in my recent Peak Oil article "The End of the World as We Know It" that we need to adapt to Peak Oil, but we can do that. This article explains how.
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How Congress Forces Businesses To Buy Heavy Trucks
April 8, 2009
by Craig Severance
Its tax time again, and as a CPA I see what my small business owners (which includes just about every contractor, realtor, lawyer, doctor, wildcatter, you name it) have purchased for their businesses last year.
Despite $4/gallon gas in 2008, once again I see that all of the businesses that bought a vehicle last year have purchased a HEAVY TRUCK. Why am I not surprised? Congress has made it very clear that is the only kind of vehicle they are supposed to buy.
You thought Congress was pushing for energy efficiency, hybrids, better fuel economy standards, and cutting greenhouse gas emissions? Not so much.
Consider these choices for business owners:
Choice A: Buy a Fuel-Efficient Auto or Light Truck. Pay $30,000 for a new fuel-efficient auto or light truck or van to be used 100% in my business. How much of that can I deduct from my business income? Because my vehicle choice is NOT HEAVY, it is automatically considered by Federal tax law to be a "Luxury Automobile" subject to very low annual deduction limits. I cannot use ANY immediate tax write-off ("Section 179 expense") to try to write off the purchase price. Instead, I must write it off over 5 years -- and the first year limit is (normally) only $2,960 for an auto, or $3,160 for a light truck or van. (In 2009 these first year limits are temporarily increased by $8,000,).
Here is the real kicker -- over those 5 years, if I buy a fuel-efficient car or light truck or van, the normal "Luxury Automobile" deductions total to only about half of what I actually paid for the vehicle: $14,160 for autos or $15,060 for a light truck or van. The rules actually forbid businesses who buy a fuel-efficient vehicle from deducting the full cost of those vehicles!
Choice B: Buy a Heavy Truck. Pay $40,000 for a new heavy truck with all the options. How much of that can I deduct from my business income? ALL of it! Strictly BECAUSE the truck is HEAVY (more than 6,000 lbs loaded Gross Vehicle Weight) it is not subject to tax deduction limits. The business can write off the entire cost the first year, if it uses the "Section 179" deduction. If it chooses instead to write it off over 5 years, it can actually write off the full purchase price with no artificial limits.
If you were a business owner faced with the above rules -- what would you do? Almost certainly, you would buy the heavy truck -- whether you need one or not. Its a straightforward business decision.*
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