One of the most important tax-related decisions you will make this year is choosing between the standard mileage rate and the actual expense method for deducting auto expenses. This article outlines how to make the best choice for your situation.
Standard Mileage Rate
The standard mileage approach is a really simple way to figure out how often a vehicle has been used for business purposes. There’s no need to keep track of individual purchases or receipts. Instead, all you have to do is keep track of your miles for the whole tax year. You must establish the percentage of your mileage that pertains to your business, just as you must with other tax deductions.
How to calculate the standard mileage rate?
If you drive 80 percent for business and 20 percent for personal purposes, divide your total mileage by 80 percent to get the business part (e.g. 20,000 miles x.80 business use = 16,000 business miles).
Once you’ve calculated your annual business miles, just multiply it by the Standard Mileage rate.
For instance, the Standard Mileage Rate is 58.5 cents/mile for the tax year 2022.
Continuing with the previous example:
Standard Mileage Deduction = $9,360 (16,000 business miles x $0.585 standard rate).
However, it’s important to know that you can’t deduct separate costs for your automobile when you utilize the Standard Mileage deduction.
For example, if the transmission broke and needed to be replaced, you could be better off adopting the Actual Expense Method to capitalize on this significant expense. The only way to be sure is to keep meticulous records and compute your tax savings in both directions.
Actual Expense Method
The Actual Expense approach – as the name implies – requires you to sum up all of the money spent on the running of your car.
The percentage of the vehicle’s commercial use is then multiplied by this number. If you drive a larger, more costly automobile, such as an SUV or a minivan, the Actual Expense Method will likely result in a greater deduction. Generally, this method is also considered more profitable, if you drive fewer business miles.
If you drive half of your miles for business and half for pleasure, you’ll multiply your total car expenditures by 50% to get the business part (e.g. $9,500 total expenses x.50 business use = $4,750 business expenses).
What can I include in my Actual Expenses?
Maintenance & repair (incl. oil changes, brake pad replacements, tire rotations)
Payments on the lease
Tools for car repairing
Auto club dues
Fees for a license, parking, and registration (not deductible in all states; check to see if this expense is deductible in your state)
Depreciation of vehicles (the best way to calculate this item is to check a depreciation table)
Can I switch from Actual Expenses to Standard Mileage Rate?
If you plan to ever switch between the two methods, you must use the standard mileage rate in the first year that you use your automobile for business. Later on, you can swap back and forth between the ways without penalty from year to year. Each year, you can compute your costs both ways and then pick the approach that provides you with the largest deduction and the most tax advantage.
Unfortunately, this does not apply to leased cars. If you lease a car, you have to stick with the Standard Mileage Rate until the end of the lease period.
If you use the Actual Expense Method in the first year of using a certain vehicle for business, you must keep on using the Actual Expense Method as long as you use the car for business.
PRO TIP: You’ll need to keep your own mileage log because even if you’re a rideshare driver with an Uber app that tracks your business miles, it still doesn’t keep up with the miles you take without passengers. You need the latter for calculation regarding the business/personal mile ratio. If you’re looking for an Automatic Mileage Tracker App that goes hand-in-hand with a Web Dashboard platform, to make sure that your Mileage Log is flawless and 100% IRS-Proof, MileageWise is a great choice.
What do mileage logs have to include?
The total mileage you drove in a certain tax year for business and personal purposes
The first and the last odometer reading of the year
Dates of your business trips
The clients’ address you visited
Purpose of your trips
How often do I need to read my odometer?
We’d like to do a bit of a myth-busting here: The IRS does not require you to record your odometer at the start and finish of your journeys.
Except at the beginning and end of each year, and when you start driving a new car, there is presently no law requiring you to register odometer readings.
Keep in mind, though, that your company may need you to record odometer readings more regularly than a year, using MileageWise you need to record your odometer when refueling, the starting mileage when you begin using the app (only once), and the closing odometer of each month.
Pros and Cons of Standard Mileage Rate vs Actual Expense Method
Standard Mileage Rate
A simple way to get a deduction
Possibility of switching to the other method year by year (if you use this in the first year)
You can’t deduct additional expenses
Actual Expense Method
You are able to deduct additional car-related expenditures
Generally considered the more profitable choice, especially if you drive fewer miles and/or own an expensive car
You need to keep track of every piece of related documentation
If you choose this method in the first year of using the car for business, you’re not able to switch to the Standard Mileage Rate
All in all, each strategy has its own set of benefits and drawbacks, and they frequently deliver radically different outcomes. Actual Expenses may result in a bigger tax deduction one year, whereas Standard Mileage may result in a larger deduction the next year.
Make sure you do exact calculations (at least yearly) to see which type of deduction type is more profitable for your particular business activity.
If you need help with your Mileage Log to make sure it meets all expectations, check out MileageWise. You can record your business miles automatically in its mileage tracker app, and complete your Mileage Log even retrospectively, in only 7 minutes/month.