When it comes to taking deductions for your business vehicles, you can either use the standard mileage deduction or the actual expenses, but not both methods.
Standard Mileage Rate
With the standard mileage rate, you take a mileage deduction for a specified number of cents (determined by the IRS) for every business mile you drive. To figure out the 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.
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, vehicle registration fees nor depreciation.
Generally, you’ll be better off using the standard mileage rate if you drive a smaller, old or an inexpensive car, particularly if you drive many business miles. This is 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
Instead of using the standard mileage rate, you can deduct the actual cost of using your car for business, plus depreciation. This requires much more record keeping , but you can potentially get a larger deduction with the actual expense method. This method requires you keep detailed records of every single expense. You’ll want to 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
- auto club dues.
The actual expense method will likely provide a larger deduction if you drive a larger, more expensive car or don’t have a lot of business miles per year.
Which Method To Choose
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. This means tracking your mileage and your actual expenses. If you do this, then at tax time you can compare which method gives you the higher deduction
You can only make this comparison and choose the method to use the first year you use your car for business. After that, you’re ability to choose which method is subject to restrictions.
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 methods after that, subject to certain restrictions.
Conversely, if you don’t use the standard mileage rate in the first year, you have to stay with the actual expense method in future years.
Therefore, 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. This leaves all your options open for later years.