If you drive a personal vehicle for business, you have two options for deducting your vehicle expenses. You can use the standard mileage rate, or you can use the actual expense method.
Which is better? As with most things when it comes to taxes, it depends. Let’s dive into using the standard mileage rate vs. actual vehicle expenses.
Standard mileage rate vs. actual vehicle expenses: What’s better for business use of a car?
With the standard mileage rate, you take a mileage deduction for a specified number of cents for every business mile you drive. The IRS sets the standard mileage rate each year. To figure out your deduction, multiply your business miles by the applicable standard mileage rate.
The standard mileage rate requires you keep track of how many miles you drive for business and the total miles you drive. You also need the date of the trip, your business destination and business purpose. Remember to capture this information in a timely fashion.
If you choose the standard mileage rate, you cannot deduct actual car operating expenses. That means you can’t deduct maintenance and repairs, gasoline and its taxes, oil, insurance, and vehicle registration fees. The standard mileage rate includes all these items, as well as depreciation.
Can I switch between standard mileage rate and actual expenses?
Yes but only if you used the standard mileage rate for the first year your vehicle was in service. After that, you can calculate both methods and use whichever gives you a larger deduction. If you use the actual expense method the first year, you must use it for the life of the vehicle.
The standard mileage rate includes what expenses?
The standard mileage rate covers a variety of car-related expenses. Cost factors include the price of gasoline, wear-and-tear, oil, maintenance, repairs and more. The IRS sets this rate every year.
Which mileage expense method is best for you?
Pros of using the standard mileage rate:
- An easy way to get a deduction for business use of a vehicle
- Flexibility to switch between methods if you use this the first year
- Simple to track for deduction: keep a mileage log of business, personal and commuting drives.
Cons of using the standard mileage rate:
- Potentially larger deduction with the actual expense method.
As a rule, you’ll be better off using the standard mileage rate if you drive a smaller car, particularly if you drive many business miles. You’re likely to benefit from using the standard mileage rate if you drive an old or inexpensive vehicle.
Why? Because you get the same fixed deduction rate no matter how much the car is worth. Because the standard mileage rate factors in depreciation, an inexpensive car might benefit more from it than an expensive vehicle.
Pros of using actual vehicle expenses method:
- Potentially larger deduction, especially if you have a more expensive vehicle
- Potentially larger deduction if you don’t have a lot of business miles per year.
Cons of using actual vehicle expenses method:
- Requires detailed record keeping of every single expense
- You lose the flexibility of hopping between practices if you use this the first year the vehicle is in service.
How to choose the method for writing off business vehicle expenses
The actual expense method will likely provide a larger deduction if you drive a larger more expensive car or an SUV or Minivan. The fewer business miles you drive, the better off you’ll be with the actual expense method.
The only way to know for sure which method is best for you is to keep careful track of your costs the first year you use your car for business. When you do your taxes, run the numbers to determine if your deduction will be larger using the standard mileage rate or actual expense method.
You can only make this comparison and select the method to use the first year you use your car for business. After that, your ability to choose which practice is subject to restrictions.
Also, if you don’t use the standard mileage rate in the first year, you are forever foreclosed from using that method in future years. If you use the standard mileage rate the first year, you can switch to the actual expense method in a later year. Then, you can switch back and forth between the two approaches after that, subject to certain restrictions.
Using actual expense deduction: Automobile deductions
Instead of using the standard mileage rate, you can deduct the actual cost of using your car for business, plus depreciation. This method requires much more record keeping, but it can result in a larger deduction. If you use this method, you must keep careful track of all the costs you incur for your car during the year, including:
- Gas and oil
- Repairs and maintenance
- Depreciation of your original vehicle and improvements
- Car repair tools
- License fees
- Parking fees for business trips
- Registration fees
- Car washing
- Lease payments
- Towing charges, and
- Auto club dues.
Choosing between the two methods
If you’re not sure about standard mileage rate vs. actual vehicle expenses, it’s a good idea to use the standard mileage rate the first year you use the car for business. Choosing this route leaves all your options open for later years.
Unfortunately, this rule does not apply to leased cars. If you lease your car and you use the standard mileage rate for the first year, you must use it for the entire rest of the lease period.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.