Vehicle expenses are one of the largest tax deductions for many self-employed taxpayers. The IRS gives you two ways to figure your car expenses:
- The standard mileage rate method allows a deduction for the default cost per mile set by the IRS for taxpayers who deduct the expense of using their personal vehicles. The default mileage rate varies for miles incurred for business, charitable, or medical purposes.
- The actual expenses method is the deduction of actual automobile expenses—including depreciation, licenses, tires, garage rent, gas, oil, towing, insurance, vehicle registration fees, lease payments and fees, and repair—by multiplying total expenses by the business-use percentage of the vehicle.
Regardless of the method you use, the IRS requires you keep a detailed mileage log. QuickBooks Online can automatically track your miles using the GPS in its mobile app. Visit QuickBooks Online to learn more about the solution.
Standard Mileage Rate | Actual Expense | |
|---|---|---|
Best For | Most taxpayers, especially if they drive older vehicles | Taxpayers who frequently purchase new vehicles and drive a limited number of miles |
Can Deduct Depreciation | Included in mileage rate | ✓ |
Can Deduct Gas | Included in mileage rate | ✓ |
Can Deduct Loan Interest | ✓ | ✓ |
Can Deduct Personal Property Taxes | ✓ | ✓ |
Can Deduct Parking Fees and Tolls | ✓ | ✓ |
Flat Rate 65.5 Cents per Business Mile | ✓ | N/A |
Primary Advantages | For those who drive a lot of miles and own older vehicles, the standard mileage rate makes it easy to figure out how much of their car-related business costs they can deduct. | For those who buy new cars often and have a lot of costs related to the purchase, maintenance, and use of the car, the actual method could lead to a higher tax deduction—especially if the taxpayer drives very few total miles. |
Use Cases
Be sure to check out our list of deductible IRS business expenses to claim your maximum deductions. We also encourage you to learn more about how to calculate your small business income tax including available tax credits to even further reduce your tax liability.
Standard Mileage Rate Method
The standard mileage rate is adjusted annually for inflation.
- 2022: For Jan. 1, 2022, to June 30, 2022, the standard mileage rate for using a vehicle, van, pickup, or panel truck for business purposes is 58.5 cents per business mile. For July 1, 2022, to Dec. 31, 2022, the rate is 62.5 cents per business mile.
- 2023: The standard mileage rate is 65.5 cents per business mile.
Your standard mileage rate deduction is simply the standard mileage rate multiplied by the number of business miles incurred. There is no need to track personal miles for the year.
Deductible Business Expenses in Addition to Mileage Rate
You can deduct parking and toll fees, the business portion of your car loan interest, and any personal property tax that you paid to renew your license plate in addition to the standard cents per mile.
For parking and tolls, the cost will be assigned based on whether it was a business-related expense. For personal property tax, you must split the cost of any personal property tax you’ve paid between your business miles and your personal miles.
Actual Vehicle Expense Method
To use the actual expense method, you must track the cost of using the vehicle for both personal and business purposes for the entire year. Then, multiply that number by the business use percentage.
Deductible Business Expenses Part of Actual Expenses
Under the actual expense method, you may claim a deduction for any of the following actual expenses times your business-use percentage:
- Depreciation
- Gas
- Oil
- Repairs
- Lease payments
- Registration fees and licenses
- Interest derived from car payments
- Car insurance
- Car washes
- Garage rent
- Tires
How To Calculate Your Deduction with the Actual Expense Method
You can calculate the actual vehicle expense by using the following steps:
- Step 1: Calculate your business-use percentage as business miles divided by total miles for the year
- Step 2: Total all actual auto operating expenses for the year (both business and personal)
- Step 3: Multiply total actual expenses by business use percentage (line 1 times line 2)
- Step 4: Add direct business expenses related to your automobile (not allocated on mileage)
- Parking at business locations
- Tolls during business tips
- Step 5: Deduction = Steps 3 plus 4
For both methods, you cannot include commuting miles as business miles. This includes the miles between your first and last business contact of the day and your home. While this is so, business miles include going from one client or customer to another.
Examples of How to Compute Standard Mileage & Actual Expense Deductions
On Jan. 3, 2022, Mr. X purchased a van for his mobile car wash business. He placed the van in use on Jan. 4, 2022. Between Jan. 4, 2022, and Dec. 31, 2022, the following applied:
- Mr. X drove the van 10,000 miles (5,000 for January to June; 5,000 for July to December)
- The van was used 80% of the time for business purposes
- The actual vehicle expenses for the entire 10,000 miles of use was $14,200 including $12,200 of depreciation.
Computing the Deduction Using the Standard Mileage Rate
For 2022, Mr. X’s standard mileage deduction for the year is $4,840 We arrived at this figure using the following calculations:
Multiply business miles x standard mileage rate:
- (5,000 miles x 80%) x .585 (standard mileage rate January to June) = $2,340
- (5,000 miles x 80%) x .625 (standard mileage rate July to December) = $2,500
- $2,340 + $2,500 = $4,840
Computing the Deduction Using the Actual Expenses Method
For 2022, Mr. X‘s deduction using the actual expense method is $11,360. We arrived at this calculation by using the following the following steps:
- Step 1: 80% business use
- Step 2: $14,200 total actual operating expenses
- Step 3: $14,200 x 80% = $11,360
- Step 4: No indirect expenses
- Step 5: $11,360 + 0 = $11,360
When we compare both outcomes, we see that Mr. X receives a higher deduction in 2022 using the actual expense method. However, in future years, as the amount of depreciation declines, the standard rate might be better.
As discussed next, Mr. X can’t switch to the standard method in future years if he uses an accelerated method of depreciation in 2022. If he plans on keeping the vehicle for a long time, then it might be better to claim the standard method in 2022 to maximize the deduction over the life of the vehicle.
How To Switch Between Vehicle Deduction Methods
Converting From Standard Mileage to Actual Expenses
You can change from the standard mileage rate to the actual expenses method if you so decide. If you switch to the actual expenses method in a later year, but your car hasn’t been fully depreciated, you have to estimate its useful life and use straight-line depreciation for that amount.
You’ll also need to reduce the tax basis of your car by 26 cents (for 2022 and 2023) per mile claimed under the standard mileage rate method. In the end, this will lower the depreciation deduction your business can take.
Converting From Actual Expenses to Standard Mileage
If you used actual expenses the first year you placed your vehicle in service and want to switch to standard mileage in a later year, you can only make this switch if you didn’t use any accelerated depreciation (modified accelerated cost recovery system or MACRS), Section 179, or bonus depreciation in an earlier year. If you used straight-line depreciation under the actual method, you can start using the standard mileage rate in any year you wish.
If you have used accelerated depreciation (MACRS), Section 179, or bonus depreciation, you must continue to use the actual expense method so long as the vehicle is being used by your business.
Frequently Asked Questions (FAQs)
You must keep track of your miles with either a log or a mileage tracker. The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement.
No, employees are not able to deduct any unreimbursed employee expenses, including automobile expenses. However, some employers will reimburse you for the use of your personal automobile using the standard mileage rate.
No. Even if the vehicle is in your name, you can claim this deduction, so long as you use your vehicle for business purposes.
Bottom Line
If you use your vehicle for business purposes, you may be able to deduct some of the expenses you incur. Both the standard mileage rate and the actual expense method are available to those who meet the requirements for these write-offs. If you’re eligible to use either method, be sure to have this article handy so that you are fully aware of the rules.
