How should I deduct my vehicle expenses?
There are a lot of costs associated with using your own car for work, especially when you’re self-employed. Putting so many miles on your car can mean increased gas costs, maintenance costs, higher car insurance rates, and other miscellaneous vehicle expenses.
That’s why self-employed drivers can and should deduct their vehicle expenses as a business expense!
However, there’s more than one way to deduct these expenses; you have the choice between the standard mileage deduction or the actual expense method.
Each method has its pros and cons, and there’s no hard and fast rule for which method will always give you the highest deduction. That’s why it’s important to understand how each one works— so you can take the highest deduction!
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What is the Standard Mileage Method?
Similar to the home office deduction, the IRS created a standardized, simplified way of deducting vehicle expenses to make tracking easier for independent workers. They looked at the average costs of operating a vehicle, and came up with a standard rate per mile that independent drivers could deduct.
Here are the standard mileage rates for the past few years:
2018 - 54.5 cents/mile
2017 - 53.5 cents/mile
2016 - 54 cents/mile
Stride Tax is the best app to easily track all of your business mileage. And it’s 100% free.
What expenses does this rate include?
Think of all of the typical costs of operating a vehicle. All of those costs are taken into account with the standard mileage rate. The rate includes average costs of gas, car insurance, car payments, lease payments, maintenance, and depreciation. Heads up: You can use the standard mileage rate when you own or lease a car.
But, if you’re renting, you’ll have to default to the actual expense method.
Be careful! A lot of drivers get in trouble by deducting both mileage and actual car expenses. Make sure you’re only picking one method and sticking to it. For example, if you choose to use the standard mileage rate, then you can’t also deduct gas or car insurance payments for the same vehicle. Those expenses are already included in the mileage rate.
What is the Actual Expense Method?
You also have the option of deducting the business percentage of each and every vehicle expense that you incur. These expenses include:
- Car payments/lease payments
- Car insurance
- License and registration
For example, if you use your car for work 65% of the time, you can deduct 65% of your vehicle costs.
There’s no clear rule for when each method might be best for you, so it’s usually a good idea to run the numbers for both methods before you pick one. However, here are a few signs that one method might be more favorable for you than the other:
Which vehicle expense method is right for you?
Regardless of which method you choose, be sure to know your car's business percentage and claim your mileage! Independent workers who depend on taking this mileage deduction to save thousands on taxes track both simultaneously. You can use Stride Tax to track both mileage and expenses (save those receipts!) and we’ll help you calculate which deduction will be the biggest at the end of the year.
Other expenses you shouldn’t forget (and can deduct with either vehicle expense method):
Regardless of which rate you choose, you can still deduct these additional vehicle expenses (per the percentage you use your vehicle for business):
- Vehicle loan interest
- Tolls and parking fees for business trips
- Towing charges
- Auto club dues (ex. AAA)
- Garage rent
Common Vehicle Deductions FAQ:
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.
What is 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.
Signs that the standard mileage deduction is right for you:
1. Your car isn’t a clunker
When you have a car that doesn’t require a ton of upkeep, or gets decent gas mileage, then you’re probably spending less on vehicle expenses than the average car owner. This means that the standard mileage rate of 54 cents per miles is probably higher than your typical expense per mile.
That would mean you get a higher deduction than if you itemized all of your actual car expenses!
2. You never remember to keep receipts
Tracking your mileage with an app like Stride Tax is pretty simple. Mileage tracking is also an easy habit to form, making it less likely that you’ll lose out on deductions than if you had to keep receipts from a variety of different costs.
3. You drive a lot
The standard mileage rate includes fixed costs, and variable costs. Fixed costs stay the same every month (like car insurance and car payments). Variable costs increase and decrease according to your use of the car (like gas and repairs).
If you drive a ton of miles in a year, you’ll reach the point where you’ve gotten back everything you would have deducted for your fixed costs. At that point, the standard rate of 53.5 cents per mile is probably much higher than your actual expense per mile.
This threshold tends to vary by kind of car, but 10,000 miles is typically a good benchmark.
Signs that the actual expense method is right for you:
1. Your car is expensive to maintain
Get terrible gas mileage, or have an older car that needs lots of work done? You may be able to deduct more if you claim each vehicle expense as a deduction.
2. Your car is newer
Depending on which depreciation method you use, you’ll likely be able to get a larger depreciation deduction in the first few years of your car’s life. If your car is relatively new, your depreciation deduction could be substantial.
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 the depreciation deductions of a new car 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.
Disclaimer: The information contained in this Guide is not offered as legal or tax advice. The U.S. federal income tax discussion included in this Guide is for general information purposes only and is not a complete analysis or discussion of all potential tax consequences that may be relevant to a particular individual. In light of the foregoing, each individual should consult with and seek advice from such individual’s own tax advisor with respect to the tax consequences discussed herein. Any information contained in this Guide is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the U.S. Internal Revenue Code of 1986, as amended.