Vehicle Deduction: The Standard Mileage vs. 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 can yield significant tax savings. However, the methods can be confusing, and picking the one that helps you save the most depends on your circumstances.
Your options are the standard mileage rate method or the actual expenses method. Here’s what to know about each, plus when you should opt for the actual expenses versus the standard mileage approach.
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 2023 taxes, the rate is 65.5 cents per mile. For 2024, it’s 67 cents.
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 may give you a higher deduction, because you won’t be able to claim depreciation as an expense.
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.
For example: Let’s say you drove 22,000 miles for business in 2023. This would give you a total deduction for the year of $14,410, which is higher than the AAA estimate for the annual cost 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’re paying off a loan for a new car 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.
Deduct depreciation using MACRS
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 percent Declining Balance Method (200% DB) and 50 percent Declining Balance Method, which provides greater deductions during the early recovery years. The third option is the straight-line method, which provides equal yearly deductions throughout the five-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.
For 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 percent. Then the vehicle-related expense you can deduct is $4,400 (calculated as $5,500 vehicle cost x 80 percent business usage).
To get a deduction of this amount using the standard mileage rate, you must have driven 6,718 business miles in 2023. This could be difficult to achieve if you’re just starting as a rideshare driver, or you aren’t working in a major metropolitan area.
I’m leasing. Should I use the standard mileage vs. actual expenses 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.
For example: If you leased a $35,000 car with yearly payments of $4,500 and used the vehicle for 80 percent 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 more than 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.
For example*: The first-year depreciation basis for a $50,000 new car you started to use 100 percent for business in 2015 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 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’ll 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. *Any examples were calculated with the 2016 mileage rate of 54 cents per mile and are not accurate for the current rate for 2023 at 65.5 cents per mile.]
Don’t forget to download the FREE Stride app, your one-stop platform to tackle all the challenges of independent work. It can help you save time and money on taxes by automatically tracking your mileage and expenses, surfacing money-saving deductions, and getting your forms IRS-ready.