Vehicle Deduction: The Standard Mileage Versus Actual Expenses Method
[The following is a guest post by Derek Davis, founder of Shared Economy CPA, which provides tax preparation and consulting services to on-demand economy and 1099 workers.]
As a rideshare driver, deducting the expenses related to the business use of your vehicle [link to tax post] can yield significant tax savings. However, the methods can be confusing, and picking the one that yields the greatest reduction in your tax liability depends on your circumstances. Your options are the standard mileage rate method or the actual expenses method.
Standard Mileage Rate Method
Option one is taking the standard IRS mileage deduction for each business mile driven. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including all the costs to operate your vehicle: gas, depreciation, oil changes, maintenance, repairs, etc. For 2016 taxes, the allowed rate is 54 cents per mile.
When to use the standard mileage method
If you are driving an older vehicle or lease your vehicle (see example below), the standard mileage rate deduction may give you a higher deduction, since there are the depreciation deductions of new car ownership aren’t available to you. Additionally, with an economical vehicle, the standard mileage rate will likely offer a higher deduction amount – you’ll be spending less on gas and maintenance than the “average vehicle”, yet taking advantage of an IRS deduction designed for the average vehicle.
An example: Let’s say you drove 18,000 miles for business in 2015. This would give you a total deduction for the year of $9,720, much higher than the $8,698 that AAA estimates are the annual costs to own and operate a vehicle.
Actual Expenses Method
The actual expenses method allows you to deduct the business portion of auto-related expenses that you incurred, based on your percentage of business mileage driven. These expenses include oil, gas, tires, lease payments, repairs, maintenance, insurance, registration fees, depreciation, etc.
When to use the actual expenses method
If you purchased a vehicle within the past year, or you are paying off an auto loan for a new vehicle with monthly payments, deducting your actual vehicle expenses may be a better option. You will be able to deduct depreciation expenses associated with car ownership.
Modified Accelerated Cost Recovery System (MACRS) is the system used by the IRS for tax depreciation of your vehicle. Under MACRS, you have the option to use the 200% Declining Balance Method (200% DB) and 50% Declining Balance Method, which provide greater deductions during the early recovery years. The third option is the Straight Line Method, which provides equal yearly deductions throughout the 5-year recovery period. Important note: if you use MACRS in the first year that your car is operational for your business, you must continue to use the actual expenses method in future years.
An example: You have $5,500 of expenses (much of it vehicle depreciation) related to the operation of a car for your rideshare business. The percentage of miles driven for business was 80%. Then the vehicle-related expense you can deduct is $4,400 (calculated as $5,500 vehicle cost x 80% business usage). To achieve a deduction of this amount using the standard mileage rate, you must have driven 7,600 business miles in 2015. This could be difficult to achieve if you are just starting out as a rideshare driver, or you aren’t working in a major metropolitan area.
I’m leasing, should I use the standard mileage or actual deduction?
If your car is leased and you use the standard mileage rate, you must use the standard mileage rate for the entire lease period (including renewals). However, under the actual expenses method you can deduct your lease payments. Calculate whether the actual expenses method or standard mileage rate method will yield a greater deduction for each year of the lease.
An example: If you leased a $35,000 car with yearly payments of $4,500 and used the vehicle for 80% business use, you would be allowed a lease deduction of $3,490 for the first year, $3,358 for the second year, and $3,238 for the third year. Additionally, you probably spent a few thousand dollars on gas and maintenance. With the standard deduction, you would need to drive over 9,000 business miles per year to obtain similar deduction amounts.
The 179 Deduction
Using Section 179 (recovering all or part of the cost of the qualifying property the year you place the property in service) to depreciate your vehicle may result in a larger deduction.
An example: the first-year depreciation basis for a $50,000 new car placed in service during 2015 and used 100% for business would be $50,000. Using MACRS, the maximum depreciation deduction for automobiles in 2015 is $3,160.
However, with the election of the section 179 special depreciation allowance, this amount increases to $11,160 for the year. You’d have to drive 21,500 miles to achieve a deduction of $11,160 with the standard mileage rate.
Other Vehicle Expenses That You Should Claim
By using the actual expenses method to reduce your tax liability, you can also include your expenses for gas, routine maintenance, insurance, and vehicle registration fees. Other vehicle expenses that are common but not many rideshare drivers to know about or forget to claim include:
- license fees
- vehicle loan interest
- tolls and parking fees for business trips
- car washing
- towing charges
- car repair equipment
- auto club dues
- garage rent
Check out more deductions for rideshare drivers here. While you will need to keep careful records of these expenses, claiming these costs can result in a larger deduction.
[The information above is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.]