Deducting Standard Mileage vs Actual Expenses on Taxes
Which to Use and How to Calculate It
If you have a vehicle that you use for your business, you may be able to deduct certain expenses on your taxes. You must meet certain requirements in order to take these write-offs. There are two methods available for deducting driving expenses related to business travel, the standard mileage rate or the actual vehicle expenses. Learn who can take these deductions and the key differences between the two.
What Is the Standard Mileage Rate?
The first option for deducting driving expenses is to use the standard mileage rate. In this deduction, you will calculate total miles driven and multiply it by the standard mileage rate.
How to Calculate Standard Mileage Rate:
The IRS will determine what the standard mileage rate is at any given time. It changes every six months to a year, so you must consult the current year’s tax form or your accountant for the current mileage rate. The mileage rate may be one number from January to June and something else from July to December.
Who Can Take Deductions Using the Standard Mileage Rate?
You can make deductions using standard mileage if:
- You have used the standard mileage rate since you first leased or bought the car.
- You have leased a car and intend to use the standard mileage rate deduction for the entirety of the lease
- You use four vehicles or fewer in your daily business operations.
Who Cannot Take Deductions Using the Standard Mileage Rate?
You cannot use the standard mileage rate if:
- You have used the actual expense tax deduction and claimed the accelerated depreciation deduction in previous years.
- You have claimed a Section 179 deduction on the vehicle.
Sample Deduction Using Standard Mileage Rate
For example: The mileage rate from January to June was .51. The mileage rate from July to December was .55. You drove 5,000 miles from January to June for business travel and 5,000 miles from July to December. Your standard mileage calculation would be as follows
2550 + 2750 = $5300 which would be your total, so you would reduce your tax basis by $5300.
If you use the standard mileage rate you cannot deduct:
You can still deduct business related:
- Parking fees and tolls.
- Interest if you have a loan on the car.
- Applicable registration fees and any taxes.
Switching to Actual Expense Method
You can switch to using the actual expense method in later years even if you first began using the standard mileage rate. However, you cannot use accelerated depreciation. You will have to use the straight-line method of depreciation.
What Is the Actual Expenses Method?
The other option available for deducting driving related expenses is the actual expenses method. You can use this method if you are not able to use the standard mileage rate or if you simply choose not to.
You Must Use Actual Expenses If:
- You have a fleet of vehicles (more than four) used simultaneously for your business activities.
- You lease a car and do not plan on using the standard mileage rate for the entirety of the lease.
- You used the actual expense calculation when your vehicle was first used for business purposes. You cannot switch to standard mileage rate in later years.
Examples of Actual Expenses You Can Deduct:
- Interest on a vehicle loan
- Vehicle depreciation (leased vehicles cannot be depreciated)
- Registration fees and tax
- Parking fees and tolls
- Garage rent
- Lease payments (an income inclusion amount must be subtracted from the amount you can deduct if the vehicle’s value is above a certain amount. This amount changes yearly so be sure to check with the IRS or your accountant.)
- License plates
- Registration fees
How Much Can You Deduct?
You can only deduct the portion of the expenses that was used for business.So if 60% of your driving was for business, you can deduct 60% of the expenses.
Sample Deduction Using Actual Expenses
For example: You drove 10,000 miles on your vehicle, but only 6,000 were for business. So 60% (6,000 divided by 10,000) of your expenses were for business. Your actual expenses were $3000. 60% of $3000 ($3000 *.6) = $1800, so you could deduct $1800.
Standard Mileage Rate vs. Actual Expenses, Which Is Better?
The best method depends on a number of factors. It depends on the vehicle you drive and the operating costs of the vehicle.
If your vehicle gets great gas mileage, then taking the standard mileage deduction will likely be more beneficial for you. If your vehicle has very high operating costs and low gas mileage, then taking the actual expense deduction may produce better savings for you.
*You should always consult the IRS or a certified accountant to decide what deductions are applicable to your specific situation.