mileage deduction explained


Deducting car-related expenses from your taxes can be simple, easy, and depending on how much you use your car for business, result in quite a large deduction. In order to benefit from this deduction, you’ll have to keep good and accurate records on all business mileage and (optionally) all car-related expenses.

Who Can Claim the Mileage Deduction?

Anyone who is self-employed and uses their personal vehicle in the course of doing business. This does not include home to office commuting.

If you are not self-employed, recent changes in tax law mean you may no longer be able claim a deduction for un-reimbursed employee expenses. Talk to your employer about directly reimbursing you.

What do I Have to do to Claim This Deduction?

 In order to claim this deduction, you must keep the following records

  • a log of the miles you drive as a result of doing business
  • proof of tolls and/or parking fees incurred during business – you can do this by keeping a log in your car and/or keep receipts. If you have a toll pass or use a parking app, then you can use that in conjunction with your mileage log to prove expenses.
  • your odometer reading at the beginning and end of the year. This is best practice and isn’t actually included in the IRS code. But the IRS does want to know how many miles you drove during the year for both personal and business. This is the easy way to do that.

and depending on how you decide to calculate the deduction…?

  • receipts of all car-related expenses (oil changes, maintenance, lease payment, loan interest, lease payments, etc)

How do I Calculate my Deduction?

There are two methods to deduct vehicle expenses you incur as a result of doing business. You can choose which method you want to use and can change the method you use each year depending on the records you keep and the deduction amount. There are a few exceptions to this rule so check out IRS publication 463 to see all the nitty gritty details, or better yet use a tax preparer or CPA to help out with your taxes.

STANDARD MILEAGE METHOD

This is the easier of the two methods. At the end of the year you will total the number of miles you drove (recorded in your log) and multiply that number by the current year’s standard mileage rate set by the IRS. For instance, in 2017 this rate was $0.535.

If you use this rate you CANNOT claim any actual vehicle expenses such as gas, maintenance and repairs, insurance, lease payments, etc.

ACTUAL CAR EXPENSES METHOD

This method allows you to claim a proportion of the actual expenses you incurred from the use of your car. Using this method you CANNOT claim the standard mileage deduction described above. To use this method you MUST keep ALL receipts related to the use of your car.

Actual Expenses include

  • Car insurance
  • Lease payments or loan interest*
  • Oil changes
  • Repairs and maintenance
  • Gas
  • Tires
  • Garage or parking spot rental
  • Registration fees*
  • Depreciation
  • Tolls and parking fees*

*These are deductible in both methods so always keep these records

If you use your car for both business and personal use, you must prorate your expenses. In order to do this calculate how many miles you drove for the entire year using the photos you took in the beginning and end of the year. Then divide the total miles in your log by the total miles you drove in the year (both business and personal). This is the number that you will multiply all your expenses by to determine your auto deduction.

Information taken from Publication 463: Travel, Entertainment, Gift, and Car Expenses at www.irs.gov.

How to Use Each Method

Over the year you drove 20,000 miles; 12,000 for personal and 8,000 for business. The expenses you incurred for the year are

  • Car insurance ($1,200)
  • Lease payments ($3,000)
  • Oil changes ($100)
  • Repairs and maintenance ($350)
  • Gas ($1,300)
  • Car Registration Fees ($172)
  • Tires ($0)
  • Depreciation (leased vehicles are not depreciated)
  • Tolls & parking ($240)

It is the year 2018 and the standard IRS mileage rate is $0.545 per mile.

STANDARD MILEAGE

Multiply your business mileage by the standard mileage rate

8,000 miles x $0.545 = $4,380

Add 100% parking and tolls incurred in the course of business

$4,360 + $240 = $4,600 deduction

ACTUAL EXPENSES

Calculate the prorate (the percentage of business miles)

8000/12,000 miles = 0.67

Add together all of your car expenses for the year (without parking and tolls)

= $6,122

Multiply total expenses (less parking and tolls) by the prorate

0.67 x $6,122 = $4,101.74

Add parking and tolls ($240)

$4101.74 + $240 = $4,341.74

In this example you receive a substantially larger benefit by using the Actual Expenses method.

The general rule is

The Standard Mileage Rate will result in a larger deduction when you drive an economical car, both in car payment and operating costs.

On the flip side, the Actual Expense method will result in a larger deduction for expensive cars and/or high operating costs.

So remember…

It’s always best to keep all receipts throughout the year and play with the numbers come tax time.

Use an accountant, CPA, or tax preparer to help you decide on the best method. They will also tell you if your records are adequate and if there are any exceptions you need to be made aware of.

Tax law is a moving target. What was true last year may not be true this year. While all of us online bloggers try to stay current, there are only so many tax code publications we can read. So take our advice and keep good records, then go see a licensed professional to do the heavy lifting!