Rajiv,a self-employed consultant,drove his auto 20,000 miles this year,15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows: Rajiv's AGI is $100,000 before considering the auto costs. Rajiv has used the actual cost method in the past. What is Rajiv's deduction for the use of the auto after application of all relevant limitations?

Question

Rajiv,a self-employed consultant,drove his auto 20,000 miles this year,15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows:  Rajiv's AGI is $100,000 before considering the auto costs. Rajiv has used the actual cost method in the past. What is Rajiv's deduction for the use of the auto after application of all relevant limitations?

Quizplus · Accepted Answer

To calculate the deduction using the actual cost method, we need to add up all the operating expenses:

$3,500 (gas, oil, and repairs) 
$2,000 (insurance)
$2,000 (depreciation)
$500 (parking and tolls)
$1,000 (license and registration fees)
-----------
$9,000 (total operating expenses)

Next, we need to calculate the business use percentage:

15,000 / 20,000 = 0.75 (or 75%)

Finally, we can calculate the deduction:

$9,000 x 0.75 = $6,750 (deduction before limitations)

However, there are two limitations that we need to consider:

1. The first-year limit for depreciation is $10,100 for cars (and lower for other types of vehicles). Since Rajiv only claimed $2,000 for depreciation, this limitation does not apply.

2. The second limitation is based on Rajiv's AGI. He can only deduct a certain amount based on his AGI:

- If his AGI is under $50,000, he can deduct the full $6,750. 
- If his AGI is between $50,000 and $150,000, he needs to apply a phase-out formula:

Deduction = ($6,750 - ((AGI - $50,000) x $0.06)) x business use percentage

In Rajiv's case, his AGI is $100,000, so we plug in his numbers:

Deduction = ($6,750 - (($100,000 - $50,000) x $0.06)) x 0.75

Deduction = ($6,750 - ($3,000 x 0.06)) x 0.75

Deduction = ($6,750 - $180) x 0.75

Deduction = $6,570 x 0.75 = $4,928

Therefore, Rajiv's deduction is the lesser of the two limitations:

- $6,750 (before limitations) 
- $4,928 (after limitations)

So his deduction is $4,928.

Rajiv,a Self-Employed Consultant,drove His Auto 20,000 Miles This Year,15,000 to Meetings