News from AVZ

December 2012

Welcome to AVZ

Planning for the Fiscal Cliff

Dear Friend,

Nearly three weeks after the U.S. election, Wall Street remains focused on politics.

With little change in the balance of power in Washington heading toward the so-called fiscal cliff, economists warn that more than $500 billion in spending cuts and tax increases that Congress passed in the wake of 2011's debt ceiling debate - which will gradually take effect starting in January - could send the U.S. economy back into recession.

Concerns about the impact of the fiscal cliff have helped send the Dow Jones industrial average down on six of the eight trading days since the U.S. election, while investor sentiment is at its most bearish in more than a year, according to a survey by the American Association of Individual Investors.

But the stakes are considerably lower for investors this time around.

In August 2011, the prospect of the United States defaulting on its debt seemed very real, and some economists and analysts warned it could trigger another global financial panic. This year's fiscal cliff debate, by comparison, is as much about tax planning as it is about investing.

With that in mind, here are the plays that some financial advisers and investment strategists are turning to.

Click here for all the details

Standard Mileage Rates for Business, Medical & Moving Increase 1¢ Per Mile for 2013

IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will increase by 1¢ to 56.5¢ per mile for business travel after 2012. This rate can also be used by employers to reimburse tax-free under an accountable plan employees who supply their own autos for business use, and to value personal use of certain low-cost employer-provided vehicles. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense will also increase by 1¢ to 24¢ per mile.

Background. The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, still claim separate deductions for parking fees and tolls connected to business driving.

Employers that require employees to supply their own autos may reimburse them at a rate that doesn't exceed the business mileage allowance for employment-connected business mileage, whether the autos are owned or leased. (Rev Proc 2010-51, Sec. 9.01) The reimbursement is treated as a tax-free accountable-plan reimbursement if the employee substantiates the time, place, business purpose, and mileage of each trip. Additionally, an employee's personal use of lower-priced company autos may be valued at the optional mileage allowance if the conditions specified in Reg. § 1.61-21(e)(1) are met.

A separate rate applies for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction. (Rev Proc 2010-51) The mileage rate for driving an auto for charitable use (14¢ per mile) is a statutory rate that's not adjusted for inflation. (Code Sec. 170(i))

IRS generally adjusts the standard mileage rate annually, based on a yearly study of the fixed and variable costs of operating an auto. However, IRS has made mid-year adjustments in certain years when necessary to better reflect the real cost of operating an auto in light of rapidly rising gas prices.

RIA observation: The advantages to using the standard mileage rate include:

Mileage rate users need not keep a record of actual expenses, or retain receipts where required. A record of the time, place, business purpose and number of miles traveled suffices.
If an auto's business expenses are deducted via the mileage rate, it is not subject to the Code Sec. 280F dollar caps or the special rules that apply if qualified business use does not exceed 50% of total use.
The mileage rate method may yield bigger deductions than the actual expense method for a thrifty, high-mileage model.

RIA observation: One of the disadvantages to using the standard mileage rate is that the mileage rate method may produce a smaller deduction than would be obtained by claiming actual business-connected operating expenses plus depreciation (or lease payments). Also, use of the mileage rate method prevents the taxpayer from claiming regular MACRS deductions (subject to the luxury auto dollar caps) for the auto in later years.

Standard mileage rates for 2013.Notice 2012-72 provides that the standard mileage rate for transportation or travel expenses is 56.5¢ per mile for all miles of business use (business standard mileage rate). The standard mileage rate is 24¢ per mile for use of an auto (1) for medical care described in Code Sec. 213; or (2) as part of a move for which the expenses are deductible under Code Sec. 217. The standard mileage rate is 14¢ per mile for use of an auto in rendering gratuitous services to a charitable organization under Code Sec. 170. (Notice 2012-72, Sec. 2)

As Notice 2012-72 notes, taxpayers using the standard mileage rates must comply with Rev Proc 2010-51. Accordingly, the standard mileage rate may not be used for a purchased auto if:

It was previously depreciated using a method other than straight-line for its estimated useful life;
A Code Sec. 179 expensing deduction was claimed for the auto;
The taxpayer has claimed the additional first-year depreciation allowance;
The taxpayer depreciated it using MACRS under Code Sec. 168; or
The taxpayer is a rural mail carriers who receive qualified reimbursements. (Rev Proc 2010-51)

A taxpayer who uses the mileage allowance method for an auto he owns may switch in a later year to deducting the business-connected portion of actual expenses, so long as he depreciates it from that point on using straight-line depreciation over the auto's remaining life. The depreciation deductions would still be subject to the Code Sec. 280F dollar caps. (Rev Proc 2010-51, Sec. 4.05(3))

Depreciation. For 2013, Notice 2012-72, Sec. 3, provides that the depreciation component of the mileage rate for autos used by the taxpayer for business purposes is 23¢ per mile. (It was 23¢ per mile for 2012; 22¢ for 2011; 23¢ for 2010; and 19¢ per mile for 2009) The depreciation component reduces the basis of the auto for gain or loss purposes. (Rev Proc 2010-51, Sec. 4.04)

FAVR plans. A taxpayer may use the mileage allowance method for a leased auto only if he uses that method (or a fixed and variable rate (FAVR) allowance method) for the entire lease period. (Rev Proc 2010-51, Sec. 4.05(2)) Employers may use a FAVR allowance method to reimburse employees who supply their own cars for business (whether the cars are leased or owned). For 2013, the standard auto cost used to compute the FAVR allowance cannot exceed $28,100 (up from $28,000 for 2012). For trucks or vans, the 2013 standard auto cost used to compute the FAVR allowance cannot exceed $29,900 (up from $29,300 for 2012). (Notice 2012-72, Sec. 4)

When the new rates are effective. The revised standard mileage rates in Notice 2012-72 (56.5¢ for business; 24¢ for medical or moving) apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes on or after Jan. 1, 2013, and to mileage allowances or reimbursements that are paid to an employee or charitable volunteer (1) on or after Jan. 1, 2013, and (2) for transportation expenses paid or incurred by the employee or charitable volunteer on or after Jan. 1, 2013.

Very truly yours,

AVZ