While Hurricane Katrina is a horrible tragedy, it's not just affecting the Big Easy. Hurricane Katrina will impact every single American that commutes to work, takes a vacation, or shops online. With gas prices at an all time high before Hurricane Katrina left her mark on our nation, most Americans were hoping that gas prices would settle down once summer passed. But gas prices have jumped as much as 80 cents a gallon across the country once Hurricane Katrina destroyed the Gulf Coast and impacted all of our lives.
Company Car vs. Mileage Allowance
Companies and individuals alike are now concerned that the federal mileage deduction or their company's gas mileage reimbursement will no longer cover the costs of operating a vehicle for business purposes.
At the beginning of 2005, the IRS standard federal mileage reimbursement rate for business use of a personal vehicle (including vans, pickups or panel trucks) was 40.5 cents a mile for all business miles driven, up 3 cents from 37.5 cents a mile in 2004; The primary reason for the increase was higher prices of vehicles and fuel in 2004.
Christopher Tanis, District Manager of a restaurant chain in New York State travels for business to 5 different stores per week. For him, the 2005 federal reimbursement rate worked out quite well, and he opted for using his personal vehicle instead of using a company car. Now that fuel costs are so high, he's decided to re-examine the financial feasibility of mileage reimbursement.
Poor Gas Mileage Cars are Losing Value
Chris Brown; owner of Auddie Brown Superstore, an automobile dealership located in Florence, South Carolina, commented "I think [the jump in gas prices resulting from Hurricane Katrina] is ridiculous because they act like we're running out of fuel and we've got plenty."
Selling cars, the standard expense for selling each vehicle used to include a full tank of fuel when they bought a car, once the price hit $2.50 a gallon, Chris starting limiting his fuel allowance to $10. Chris explains, "Some cars take $80 worth of fuel to fill up and on a new car we're lucky if we make $80 in profit on them -- especially the new cars. Our new car profit margin is at its lowest ever. At this point we're just glad to sell the car and bring in some inventory."
Now that gas prices have gone through the roof, small business owners are working furiously to dump those 6,000 pound gross vehicle weight fuel guzzlers they bought only a year or two previously under a tax loophole which allowed small businesses to write-off most of vehicle cost in one year.
Mr. Brown has experienced this situation on a larger scale than most of us, adding "People come in to trade their larger trucks and SUV's with poor gas mileage for smaller, better gas mileage vehicles. Most consumers are not only so upside-down (owing more on the car than its fair market value) but are finding it hard to trade-in these larger vehicles. Not only they are valued less because of gas prices but people just cannot afford the fuel that would be needed to maintain these lower gas mileage vehicles."
Weighing your Options
You, too, may have to analyze your business vehicle deduction options, now that high fuel prices seem like they're here to stay. You may find that while maintaining a mileage log and claiming a car deduction or mileage allowance isn't right for your situation, the IRS will allow you to deduct actual vehicle expenses based on the percentage of business vs. personal miles. For those who use their vehicle mostly for business, minimal personal usage combined with the burden of record-keeping may justify a company car. There's no right answer for everyone. Literally, your mileage may vary. Consider your options and you'll find the way to steer yourself to the best tax advantages in these new circumstances.
