If you use your vehicle for business, you may qualify for a tax deduction. The deduction is calculated based on a standard mileage rate (54.5 cents for 2018) or you can deduct car expenses like gas or repairs. If you use your vehicle for personal and business, keep track of the miles driven.
What the Standard Mileage Rate for 2018 Is
The standard mileage rate is issued each year by the IRS. This rate is used to calculate the amount that you can take as a tax deduction to reimburse you for business-related car expenses like gas, repairs, insurance, and vehicle registration. In addition to taking the standard mileage rate 2018 deduction, you can deduct any business-related parking fees and tolls.
The tax deduction allowed is based on the total miles driven for business purposes. For 2018, the standard mileage rate for business is 54.5 cents ― up from 53.5 cents for 2017. To calculate your deduction on your tax return that you will file in 2019, you need to use the 2018 rate (54.5 cents). Let’s walk through an example of how to calculate your tax deduction using the standard mileage rate.
Standard Mileage Rate 2018 Example
Let’s say that you drove a total of 15,000 miles this year, including business and personal mileage. According to your business mileage tracker smartphone app, you drove a total of 6,500 miles to see clients and attend a couple of business conferences. Here is how you would calculate your tax deduction using the standard mileage rate method:
6500 X .545 cents per mile = $3,542.50
What the 2 Ways You Can Deduct Car Expenses Are
There are two methods available to deduct car expenses, the standard mileage rate method and the actual car expense method. If you don’t do a good job of keeping track of your receipts, go with the standard mileage rate method.
1. Standard Mileage Rate Method
As illustrated above, with the standard mileage rate method, you use a standard rate set by the IRS each year ― currently 54.5 cents per mile for 2018 ― to calculate your tax deduction for business vehicle usage. With this method, all you need to do is keep track of the total miles that you have driven for business and the total miles that you have driven for personal use.
2. Actual Car Expense Method
The second way that you can deduct car expenses is called the actual car expense method. In addition to keeping track of the total miles you have driven for business and personal reasons, you will need to keep good records of all receipts and other documentation that includes the amount, date, and description of the costs you plan to claim as a deduction.
These costs include but are not limited to parking fees, tolls, gas, and repairs. With this information, you will calculate the percentage of time the vehicle was used for business and multiply that percentage by the total car expenses that you had for the year. In the What is the actual expense deduction section, we will show you how to calculate this deduction.
Both methods require you to track business miles accurately. Fortunately, this is as simple as getting the right smartphone app. Check out our guide on the best mileage tracker app or try QuickBooks Self-Employed. With the QuickBooks Self-Employed app, you can track your mileage automatically as well as all of your business income and expenses. Try QuickBooks Self-Employed free, for 30 days.
Pros & Cons of Standard Mileage Rate vs. Actual Vehicle Expenses
To maximize your tax refund, use the method that will give you the highest mileage tax deduction. While the standard mileage rate is ideal if you don’t keep your receipts organized, you could miss out on a larger tax deduction if you have high vehicle expenses. On the flip side, the actual expense method will take more time because you need to keep track of all car expenses. However, you could qualify for bonus depreciation under the actual expense method.
Standard Mileage Rate ― Pros
A couple of the pros shared with us by Kristina M. Grasso, a Master Tax Advisor with H&R Block are: “For those who are not in the habit of keeping good records, the standard mileage rate method will work best. In addition, the standard mileage rate works to your advantage if you have a lot of business miles.”
Standard Mileage Rate ― Cons
A couple of the cons shared with us by Kristina M. Grasso, a Master Tax Advisor with H&R Block are: “There is potentially a larger deduction available with the actual expense method. However, keep in mind that the standard mileage rate cannot be used for a fleet of vehicles ― five or more used at the same time. In addition, if accelerated depreciation, including bonus, or a section 179 deduction was taken the year the vehicle was placed into service you cannot use the standard mileage rate.”
Actual Expenses Method ― Pros
One of the pros of using the actual expense method that Kristina M. Grasso, a Master Tax Advisor with H&R Block shared with us is: “Bonus depreciation, also referred to as a special depreciation allowance, may lead to a potentially larger deduction if you have a more expensive vehicle. For example, a car that cost $100,000 will most likely have higher gas and repair and maintenance fees than one that cost $20,000.”
“If you don’t have a lot of business miles per year because all of your clients are in proximity to you, then you will benefit more from deducting actual expenses over miles.”
Actual Expenses Method ― Cons
There are several cons associated with using the actual expense method. Kristina M. Grasso, a Master Tax Advisor with H&R Block mentioned three of them: “First, calculating depreciation can be rather complicated and confusing. Second, you are required to keep detailed records of every car-related expense that you wish to deduct. Finally, you lose the flexibility of hopping between methods if you use the actual expense method the first year you use the vehicle for business.”
Qualifications for Standard Mileage Rate Deduction 2018
To use the standard mileage rate 2018 deduction, you must answer yes to three questions. First, did you use the car for business reasons? Second, can you determine the percentage of time that you used the car for business reasons? Third, if this is not the first year that you have taken a car deduction, did you use the standard mileage rate in the first year that you took a car deduction?
1. Did You Use the Car for Business Reasons?
You cannot deduct the use of your car for personal reasons. For example, even though you may drive 100 miles a week to shuttle your kids to school and all of their extracurricular activities, you cannot deduct those miles on your taxes.
However, if you work as an Uber or Lyft driver when you’re not driving your kids around, then you can deduct the miles driven to take your clients to and from their destinations because those miles were driven to conduct business.
2. Can You Determine the Amount of Time That You Used the Car for Business Reasons?
This is the one requirement that people struggle with the most. As with all tax deductions, you need to be able to provide proof to the IRS that every tax deduction you claim is fact and not fiction. If you use your car for both personal and business reasons, then you must keep track of the miles driven for business vs. the miles driven for personal reasons.
This will be an important part of calculating the tax deduction you are allowed for your car expenses. The good news is that there are a number of great apps that you can download to your cell phone that will keep track of every mile driven and even separate business and personal mileage for you. To learn more about the apps that we recommend, check out our Best Mileage Tracker App guide.
One app that handles mileage tracking and much more is QuickBooks Self-Employed. It allows you to auto track your mileage with auto start and stop. It also enables you to manage income and expenses, receipts and filing and payment of estimated taxes. Try QuickBooks Self-Employed free for 30 days.
3. If This Is Not the First Year that You Have Taken a Car Deduction, Did You Use the Standard Mileage Rate in the First Year That You Took a Car Deduction?
To qualify to take the standard mileage rate 2018 deduction, you must use the standard mileage rate in the first year that you take a car deduction. Later on, if you decide to switch to the actual car expense method, you can do so.
However, you cannot use the actual car expense deduction in the first year and then switch to the standard mileage deduction later on. This primarily has to do with depreciation, which we will discuss in the next section.
What the Actual Car Expense Deduction Is
If you don’t use the standard mileage rate, then you may be able to deduct your actual car expenses. The actual car expense deduction requires you to total up all of your vehicle expenses for the year like gas, repairs, and insurance and multiply the total by the percentage of time you used your vehicle for business.
The types of expenses that may qualify for the actual car expense deduction are:
- Lease payments
- Garage rent
- Parking fees
- Registration fees
Depreciation is a tax deduction that you can take to recover the cost of a car that you own, and it also applies to other assets like furniture and computers. In general, when you purchase a car or other asset, you cannot deduct the entire cost in the first year unless you qualify for what’s called the Section 179 deduction.
The Section 179 deduction is a depreciation method that allows you to deduct up to $1 million (2018) of assets in the year that you purchased them. To find out if you qualify for this deduction, check out our Section 179 calculator. If you don’t qualify for Section 179, you are required to depreciate your car by spreading the cost of the car over the number of years that you expect to use it for business.
For example, if you bought a car for $20,000 and expect it to last five years, you might depreciate a few thousand dollars each year until you stop using the car. Check out our Car Depreciation guide to gain a better understanding of how to depreciate your car for tax purposes.
Vehicle Lease Payments
If you lease a car that you use for personal and business reasons, you are not allowed to depreciate the car, but you can deduct part of the lease payment for the time that the car is used for business. To do so, you will have to determine the percentage of time that you use your car for business. The best way to do this is to use a mileage tracker app.
Actual Car Expenses Example
Let’s say that you decided to use a mileage tracker app to keep track of your miles this year. Based on the miles recorded by the app, you drove a total of 20,000 miles this year. Of those 20,000 miles, you drove 10,000 miles to see clients, attend business meetings and attend a few seminars.
Your $5,000 in actual car expenses are:
|Total car expenses||$5,000|
|Miles Driven for Business||10,000|
To calculate your tax deduction using the actual expense method, you will need to calculate the business percentage use of your vehicle first, and then apply that percentage to your total car expenses for the year to get your allowable deduction. Here are the calculations:
Step 1: Calculate the percentage of time the car was used for business:
10,000/20,000 = 50%
Step 2: Multiply the business-use percentage from Step 1 by the total car expenses:
$5,000 X .50 = $2,500
Note: Keep in mind that if you lease a car, then your lease payments would be included in this calculation in place of depreciation.
What the Qualifications for the Actual Car Expense Deduction Are
To qualify for the actual car expense deduction, you must say yes to the same questions that are required to take the 2018 standard mileage rate deduction. First, did you use your vehicle for business reasons? Second, can you calculate the percentage of time you used your car for business? Third, do you have sufficient documentation for all of the expenses you plan to claim as a deduction?
As we discussed earlier, if you start out using the actual expense method then you cannot switch to the standard mileage rate later on. However, you may switch from standard mileage rate to actual car expense as long as you use the standard mileage rate method in the first year you take a deduction.
The following are questions you must be able to provide a “yes” response to take the actual car expense deduction.
1. Did You Use the Car for Business Reasons?
As mentioned in our discussion on the standard mileage rate, you must use your car for business reasons to claim a tax deduction. You are not eligible to deduct the use of your car for personal things like grocery shopping and dropping your kids off at soccer practice.
2. Can You Determine the Percentage of Time That You Used the Car for Business Reasons?
To claim a tax deduction for a car that you use for both business and personal reasons, you must be able to determine the number of miles the car was driven for business reasons. If you haven’t used a mileage tracker app, check out our top recommendations to learn more.
3. Do You Have Receipts or Other Sufficient Documents to Prove All Expenses That You Plan to Claim as a Deduction?
If you think about it, tax filing is based on the “honor” system. The IRS does not require that you send any supporting documents to prove that your expenses are legitimate. However, there may come a day when you will have to do just that. This is why it is extremely important to keep accurate records of the miles driven for business vs. personal.
In addition, you must have receipts or other documents that show the date, amount, and a description of the car expenses that you are claiming as a tax deduction. Be sure to keep these records for at least seven years after you file your tax return. Refer to our SMB Accounting & Tax Guide for additional information on what documents to keep and how long to keep them.
The Bottom Line
One benefit of being a small business owner is the ability to reduce your tax bill with legitimate tax deductions like vehicle expenses. Whether using the actual or standard mileage method of calculating your vehicle expense, it is crucial you keep an accurate log of your business miles.