SECTION 3. BACKGROUND AND

CHANGES

.01 Under § 162(a), a taxpayer may deduct the ordinary and necessary expenses the taxpayer pays or incurs during the taxable year in carrying on any trade or business. An employee or self-employed individual may deduct the cost of operating an automobile to the extent that it is used in a trade or business. Under § 262, a taxpayer may not deduct any portion of the cost of operating an automobile attributable to personal use.

.02 Section 274(d) provides, in part, that a taxpayer may not deduct expenses for travel or listed property unless the taxpayer complies with certain substantiation requirements. Under § 280F(d)(4), listed property includes passenger automobiles and any other property used as a means of transportation.

.03 Under § 1.274–5(g) and (j), the Commissioner may prescribe rules and establish methods for taxpayers to use mileage rates and allowances to substanti

ate the amount of ordinary and necessary expenses of using a vehicle for local transportation and transportation while traveling away from home. Under these rules, mileage allowances that comply with reasonable business practice are treated as (1) equivalent to substantiation, by adequate records or other sufficient evidence, of the amount of transportation expenses for purposes of § 1.274–5(c), and (2) satisfying the requirements of an adequate accounting to the employer of the amount of the expenses for purposes of § 1.274–5(f).

.04 Section 62(a)(2)(A) allows an employee, in determining adjusted gross income, a deduction for the expenses allowed by Part VI (§ 161 and following), subchapter B, chapter 1 of the Code, the employee pays or incurs in performing services as an employee under a reimbursement or other expense allowance arrangement with a payor.

.05 Section 62(c) provides that an arrangement is not treated as a reimbursement or other expense allowance arrangement for purposes of § 62(a)(2)(A) if it—

(1) Does not require the employee to substantiate the expenses to the payor, or

(2) Allows the employee to retain any amount in excess of the substantiated expenses.

The substantiation requirements described in § 62(c) do not apply to an expense to the extent that the Commissioner provides that substantiation is not required.

2009–51 I.R.B. 930 December 21, 2009

ness standard mileage rate on a yearly basis and in lieu of computing the fixed and variable costs of the automobile allocable to business purposes (except as provided in section 9.06 of this revenue procedure). Items such as depreciation or lease payments, maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insurance, and license and registration fees are included in fixed and variable costs for this purpose.

.04 Parking fees, tolls, interest, and taxes . A taxpayer may deduct, as separate items, parking fees and tolls attributable to use of the automobile for business purposes. A taxpayer also may deduct interest relating to the purchase of the automobile and state and local personal property taxes as separate items to the extent allowable under § 163 or § 164, respectively. Under § 163(h)(2)(A), interest is nondeductible personal interest if it is paid or incurred on indebtedness properly allocable to the trade or business of performing services as an employee. Section 164 provides that state and local taxes a taxpayer pays or incurs in connection with an acquisition or disposition of property are treated as part of the cost of the acquired property or as a reduction in the amount realized on the disposition of the property. If the automobile is operated less than 100 percent for business purposes, a taxpayer must allocate the business and nonbusiness portion of the allowable taxes and interest deduction.

.05 Depreciation . For automobiles a taxpayer owns and has placed in service for business purposes, and for which the taxpayer used the business standard mileage rate for any year, 16 cents per mile is treated as depreciation for 2003 and 2004, 17 cents per mile for 2005 and 2006, 19 cents per mile for 2007, 21 cents per mile for 2008 and 2009, and 23 cents per mile for 2010 for those years in which the taxpayer used business standard mileage rate. If the taxpayer used actual costs for one or more of those years, these rates do not apply to any year in which the taxpayer used actual costs. The depreciation described above reduces the basis of the automobile (but not below zero) in determining adjusted basis as required by § 1016.

.06 Limitations . (1) A taxpayer may not use the business standard mileage rate to compute the de

to return the portion of the allowance for miles of travel not substantiated.

.07 Section 1.62–2(h)(2)(i)(B) provides that if a payor pays a mileage allowance under an arrangement that meets the requirements of § 1.62–2(c)(1), the portion, if any, of the allowance that relates to miles of travel substantiated in accordance with § 1.62–2(e), that exceeds the amount of the employee’s expenses deemed substantiated for the travel pursuant to rules prescribed under § 274(d) and § 1.274–5(g), and that the employee is not required to return, is subject to withholding and payment of employment taxes. See §§ 31.3121(a)–3, 31.3231(e)–1(a)(5), 31.3306(b)–2, and 31.3401(a)–4 of the Employment Tax Regulations.

.08 This revenue procedure includes modifications to Rev. Proc. 2008–72 as follows:

(1) Section 5.01 contains revisions to the business standard mileage rate.

(2) Section 7.02 contains revisions to the medical and moving standard mileage rate.