Q. If I use the standard mileage rate to calculate my business mileage deduction for 2015, can I switch to the actual expense method to calculate the deduction for 2016?

A. Yes, you can switch to the actual expense method. The standard mileage rate went down substantially for 2016 (54 cents per mile versus 57.5 cents in 2015), so some people might be thinking about switching to the actual expense method to calculate their deduction for the year. Using this method, you keep track of all your car expenses during the year, including gas, repairs, and a depreciation deduction as well for business driving (subject to an annual cap). You then deduct your business use percentage of the total.

The actual expense method is not as popular as the standard mileage rate because it requires more record keeping, but it can lead to a larger deduction, especially for cars that are more expensive than average to operate.

The good news is that use of the standard mileage rate is optional. Drivers may always base their mileage deduction on the actual expenses they incur during the year while engaging in tax deductible driving. Thus, if you use the standard mileage rate for 2015, you may use the actual expense method for 2016.

However, if you switch to the actual expense method after using the standard mileage rate, you’ll have to reduce the tax basis of your car by a portion of the standard mileage rate deductions you already received. This will reduce your depreciation deduction.

When you do your 2016 taxes, you can calculate your deduction both ways and use the method that gives the largest deduction. However, while you can always use the actual expense method, there are restrictions on switching from that method to the standard mileage rate.

To use the standard mileage rate at all, you must use it the first year you drive your car for business. If you use the standard mileage rate the first year, you can switch to the actual expense method in a later year, provided that you used the straight-line method of depreciation during the years you used the actual expense method. This depreciation method gives you equal depreciation deductions every year, rather than the larger deductions you get in the early years using accelerated depreciation methods.

Keep in mind that you can’t switch back
 to the standard mileage rate after using the actual expense method if
 you took accelerated depreciation, a Section 179 deduction, or bonus depreciation on the car.

Our resident small business tax expert, Stephen Fishman, is here to answer your small business tax questions. Have a tax question for Stephen? Submit it here.


Stephen Fishman

Stephen Fishman

Stephen Fishman is a self-employed tax expert and regular contributor to MileIQ. He has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for entrepreneurs, independent contractors, freelancers and other self-employed people. He is the author of over 20 books and hundreds of articles, and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Visit Fishman Law and Tax Files for more information on his work.
Stephen Fishman