Amended and change to STM - IRS code section or tax law case support

[TAXNJ]

Any IRS code section or tax law case supporting the following?

Scenario:

Amend to change from Actual to Standard Mileage method in first year?

2015 tax return was filed and accepted:
First year (2015) vehicle placed in service with the “ACTUAL METHOD” by Preparer A when STM (standard mileage method) should have been selected.

2016 tax return: Not filed - on extension
Different Preparer B is looking to determine if the method selected in 2015 can be amended before 2016 tax return is filed or if the original method is irrevocable

[Rapid Robert]

Not a direct answer to your question, but I believe the key issue comes down to whether MACRS is used in first year (actual costs), or electing out of MACRS by using standard mileage deduction. The conventional wisdom, as you imply, is that once you use actual in the first year, you can't switch to Standard, because the choice in the first year is irrevocable.

Per Rev. Proc. 2010-51, "By using the business standard mileage rate, the taxpayer has elected to exclude the automobile (if owned) from MACRS pursuant to
§ 168(f)(1)" (irrevocable election)

I have just reviewed a very long discussion in another tax pro forum, where a number of experts all seemed to agree there is no flexibility here. One dissenter tried for a very long time to argue otherwise using the appropriate regs and procs, but I don't think he succeeded in changing anyone else's mind. He was trying to say one could do actual costs the first year with some kind of straight line depreciation which would then allow a switch, but SL MACRS depreciation is still MACRS, and standard mileage is not MACRS.

I have not explored it at all, but my only thought is that somehow Form 3115 could be used to request a change of accounting method used in the first year. However if this was straightforward to do, I think we'd see many articles and discussions about it.

[TaxGuyBill]

It is too late to make the election. Using Actual Expenses is not "irrevocable", but the election for the Standard Mileage Rate needs to be made by the due date of the tax return.


The election to use the Standard Mileage Rate is an election out of MACRS, using §168(f)(1). Then §301.9100-7T says:

"Time and manner of making certain elections ... 168(f)(1) Election to exclude certain property from the accelerated cost recovery system ... (2)Time for making elections -(i)In general. Except as otherwise provided in this section, the elections specified in paragraph (a)(1) of this section shall be made by the later of -(A) The due date (taking extensions into account) of the tax return for the first taxable year for which the election is to be effective".

https://www.law.cornell.edu/cfr/text/26/301.9100-7T

Although §301.9100-2 probably gives you an extra 6 months, it is still past that time frame. Sorry.

[Kram BergGold]

Really?

Are you saying that a person filing 2 years late can't use the standard mileage rate but must use actual?

[Rapid Robert]

Correct. From Pub 463:

"You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. You can’t revoke the choice."

I haven't heard of it being enforced, but that's just my limited experience. I imagine I am like many preparers who inadvertently overlook this requirement when preparing a delinquent return which has first-year use of a personal vehicle for business.

[Snaggletooth]

Actual Method is a Siren Song

All of the answers above are consistent, and it appears the decision, once filed, is set in stone by the due date.

I'm not aware of any situations (among my clientele) where an actual election in Year 1 proves to be in the best interest given more than a year or two.

The typical case is someone who is using their vehicle in their business, and is wanting the govt to help pay for their Cadillac Escalade or big dually truck. Client succumbs to the siren song of grabbing the most in year one. To begin with, such a purchase is generally not very business-savvy. Imagine using your Escalade to deliver Avon products, or getting 8 mpg driving across town to bid on a gutter job. I would suspect the Avon delivery probably occurs in a Ford Tempo and the preparer is told the Escalade is accumulating the mileage.

If the business is new, and will be successful, the deduction is almost always needed more in later years.

At some point, usually in year 3 or thereabouts, the expensive vehicle no longer can be supported as over 50% usage in the business, and then the depreciation has to be adjusted if previously maximized. If the client continues to use the vehicle in business after year 3, then the actual expenses will almost never exceed the mileage rate.

Another advantage for the mileage rate: The vehicle actually has a BASIS, just like it does for the actual method. The basis is the original cost times the business percentage, less the element of depreciation taken with the mileage. (in recent years 22-24 cents/mile) And such depreciation NEVER has to be recaptured.

[TaxGuyBill]

And such depreciation NEVER has to be recaptured.

Huh???

If the business portion is sold at a gain, the depreciation is recaptured.

[AZUKHiker]

Ans deductible loss if sold

All of the answers above are consistent, and it appears the decision, once filed, is set in stone by the due date.

Another advantage for the mileage rate: The vehicle actually has a BASIS, just like it does for the actual method. The basis is the original cost times the business percentage, less the element of depreciation taken with the mileage. (in recent years 22-24 cents/mile) And such depreciation NEVER has to be recaptured.

Agreed with previous post if sold for more than adjusted basis the depreciation will be recaptured.

Conversely if sold for a loss there is a deductible loss for the business part of the loss based on total and business mileage.

[Snaggletooth]

Don't Think So

It makes accounting and taxable sense that depreciation would be recaptured, but I don't believe that is the case. I can't give you a cite, but I was once taught that the depreciation allowance in the STM was stand-alone in lieu of taking depreciation using the "actual" calculation (where the effect of depreciation taken must be recognized). The depreciation taken in the STM simply goes off the cliff and is ignored in case of a gain because it is simply a stand-alone measure.

By my own clumsy definition, "stand alone" is not mixed with other calculations but stands on its own. Very much like meals per diem - if the allowance is not eaten up, the per diem rate is claimed and the unused amount is ignored.

The most common fate of STM depreciation calculates in the event of a trade-in, where the business portion initial basis of the new vehicle is increased by the unamortized value of the traded vehicle.

I could never figure out how to research this in code or regs, but I was taught this long ago. I could be wrong - wouldn't be the first time.

[TAXNJ]

TaxGuyBill and Rapid Robert, but ….

TaxGuyBill and Rapid Robert - Thanks for the replies, but…

Does the following change your position? Also, §301.9100-2 quite possibly it may apply for a 12 month extension based on the following additional information:

2015 TAX RETURN:
4/7/16 EXTENSION FILED 8-3-17 RETURN FILED & ACCEPTED

2015 tax return was filed and accepted:
First year (2015) vehicle placed in service with the “ACTUAL METHOD” by Preparer A when STM (standard mileage method) should have been selected.

Basically the “Amended” return is correcting an inadvertent error within one month of filing the return. Also, there is no tax benefit by filing the “Amended” return.

§ 301.9100-2 Automatic extensions - Procedural requirements
NOTE (Procedural requirements. Any return, statement of election, or other form of filing that must be made to obtain an automatic extension must provide the following statement at the top of the document: "FILED PURSUANT TO § 301.9100-2".)

if interpreting § 301.9100-2 correctly – ON TOP OF THE “AMENDED” RETURN it should include "FILED PURSUANT TO § 301.9100-2")

[TaxGuyBill]

No, that doesn't change my mind.

§301.9100-2 only allows an extra 12 months for a few, selected items. Everything else is only an extra 6 months. That 6 month period starts on the "due date of the return including extensions" (October 15th) and must be "timely filed". It is too late.

https://www.law.cornell.edu/cfr/text/26/301.9100-2

[dtlee]

I will go along with TaxGuyBill and Rapid Robert on this. I only see a 6-month leeway on this. They are stuck with the Actual Expense Method they chose to use.

This puzzles me:

Another advantage for the mileage rate: The vehicle actually has a BASIS, just like it does for the actual method. The basis is the original cost times the business percentage, less the element of depreciation taken with the mileage. (in recent years 22-24 cents/mile) And such depreciation NEVER has to be recaptured.

It makes accounting and taxable sense that depreciation would be recaptured, but I don't believe that is the case. I can't give you a cite, but I was once taught that the depreciation allowance in the STM was stand-alone in lieu of taking depreciation using the "actual" calculation (where the effect of depreciation taken must be recognized). The depreciation taken in the STM simply goes off the cliff and is ignored in case of a gain because it is simply a stand-alone measure.

By my own clumsy definition, "stand alone" is not mixed with other calculations but stands on its own. Very much like meals per diem - if the allowance is not eaten up, the per diem rate is claimed and the unused amount is ignored.

The most common fate of STM depreciation calculates in the event of a trade-in, where the business portion initial basis of the new vehicle is increased by the unamortized value of the traded vehicle.

I could never figure out how to research this in code or regs, but I was taught this long ago. I could be wrong - wouldn't be the first time.

There is nothing in the code or regulations that says that this depreciation is ignored. It can be recaptured under the proper circumstances and has a very complicated handling when a part-personal vehicle is traded-in since the personal portion not depreciated (i.e., based on personal mileage) in the old vehicle is basically excluded from depreciation when carried over to the new vehicle (quite over-simplified explanation).

One possible source of the confusion is that the basis of the vehicle cannot be depreciated below zero. However, nothing stops us from using the standard mileage rate on a 20 year-old vehicle that cost $30,000 but has been driven 15,000 business miles every year. Such a scenario was unlikely when we were limited to 15,000 depreciable miles a year and 60,000 total miles of depreciation, but vehicles are lasting a lot longer than that now.

I have just reviewed a very long discussion in another tax pro forum, where a number of experts all seemed to agree there is no flexibility here. One dissenter tried for a very long time to argue otherwise using the appropriate regs and procs, but I don't think he succeeded in changing anyone else's mind. He was trying to say one could do actual costs the first year with some kind of straight line depreciation which would then allow a switch, but SL MACRS depreciation is still MACRS, and standard mileage is not MACRS.

This sounds like the way the IRS originally wanted it to work when they came up with the 60,000 mile limit. You were allowed to use something that I think was called "units of consumption" in that first year based on the number of business miles relative to the 60,000 mile "life" of the vehicle. Switching back and forth between actual expenses and the standard mileage rate was switching back and forth between the 60,000 mile rule and the dual mileage rate. The last year that rule might have existed was 1989. After that, they got rid of the 15,000/60,000 rule.

Your point about Straight-Line MACRS is a good point, since if the Standard Mileage Rate is used in the first year, the vehicle is excluded from any MACRS method and you must use old-fashioned (i.e., pre-ACRS) Straight-Line depreciation if you ever use Actual Expenses (and this requires you to compute the start-of-year basis as the original basis minus prior depreciation [including the depreciation component of the standard mileage rate used]).

[dtlee]

Not that anyone really cares....

I think I have the history somewhat verified. Using a discussion with one of the instructors who taught me at H&R Block decades ago and Google Books, I have some snippets of what may have once been "knowledge." Obviously none of this is authoritative, but I am not trying to support a position on a tax return so much as to clarify where various ideas have arisen from. Prior to ACRS (1981), you could use pre-ACRS Straight-Line the first year and then switch back and forth between the Optional Standard Mileage Rate and the Regular Actual Expenses methods. When ACRS was created, it became temporarily unclear since you could no longer elect the older Straight-Line method.

For example, in 1982 Publication 463, it says:

Note: If you use the standard mileage rate for a car placed in service after 1980, you are considered to have made an election to exclude the car from the Accelerated Cost Recovery System (ACRS), discussed earlier. However, if you use ACRS for the first year a car is place in service after 1980, you cannot use the standard mileage rate.

It follows with the discussion of the 15,000 and 60,000 miles rules. There was no discussion of how you might avoid using ACRS in the first year. The instructor believes that, lacking better direction from the IRS, that Block identified using the 60,000 mile units of consumption method as an alternative in the first year if actual expenses were used to avoid using ACRS (since it was no longer valid to elect pre-ACRS Straight-Line). She did not know if they had received a letter ruling to take this position or not, but it is likely that they did.

At some point later, the IRS clarified its position as to whether or not there was a way to avoid using ACRS if the Regular Actual Expense Method was used in the first year and Block stopped preaching the units of consumption method. This was definitely clarified by 1984. From 1985 Publication 534:

When standard mileage rate may be used. If you first placed your car in service after 1980, you may not use the standard mileage rate unless you use it in the first year you place your car in service in your business. Otherwise, use of the standard mileage rate is optional each year.

[TAXNJ]

Further research show......

TAXGUYBILL AND RAPIDROBERT

FURTHER RESEARCH SHOWS:
The change can be made if the 2016 return has not been filed using the actual expense method.

If the taxpayer has filed their 2016 return they cannot amend 2015 to indicate that they never used the actual method. For depreciation method changes, Rev Proc 2007-16 waives the rule in Rev Rul 90-38.

Thought that if the second year was not filed the change could be done so the above Rev Proc 2007-16 thus allows in this scenario.

Thanks for your prior comments

[TaxGuyBill]

But you are not just making a change in method of accounting. The taxpayer missed making a required election. Those Revenue Procedures don't change the requirements of when to make an election.