Post Title
Author name
The simplest method for calculating your vehicle-related deductions is to use the standard mileage deduction. This method is pretty simple to use and, from my experience, is the right choice for 80-90% of the people I have visited with.
Certain expenses related to the use of an automobile for business use are deductible. How to treat auto expenses, whether for your business or as an employee using their vehicle for business, can be a powerful, tax planning tool.
Auto deductions can essentially take 2 separate paths – actual expenses or the standard mileage rate.
Standard Mileage Rate
The simplest method for calculating your vehicle-related deductions is to use the standard mileage deduction. This method is pretty simple to use and, from my experience, is the right choice for 80-90% of the people I have visited with.
You are eligible to count any miles you drive for business-related purposes. In 2018, the standard mileage rate was 54.5 cents per mile. With gas south of $2.00 here in Oklahoma City, that’s a nice-sized deduction. If you get 25 miles per gallon, then you get a $13.00 deduction for each gallon of fuel used.
In order to claim this deduction, you do need to keep a mileage log. Your mileage log should include the date, start time and end time, the activity involved, and the beginning and ending of odometer readings. If the IRS examines you, you can expect them to want to see validation of your mileage. There are plenty of apps and easy ways to do this now.
When using the mileage method, you don’t get to deduct any other automobile expenses. If you drive 10,000 business miles, then 10,000 x $0.545 = $5450 is your deduction. Once this method is chosen, you are not allowed to deduct any other expesenses. If you’d prefer to deduct other items, you need to use the Actual Expenses method.
Actual Expenses
This method can be more complicated. Instead of taking a mileage deduction, you would deduct the various actual expenses from the automobile usage, including:
• Gas and Oil
• Maintenance and repairs
• Auto insurance
• Auto loan interest
• Registration
• Depreciation
Depreciation is where this method can become a little tricky. Depreciation is how you recapture the expense of purchasing a vehicle. A vehicle purchased for $30,000 can be depreciated up to $30,000 over time. Purchasing an automobile for $30,000 doesn’t mean you get to deduct the whole $30,000 in one year, though in some cases you can. The type of automobile and even the amount you purchase the car are factors in what options you have in depreciating the vehicle.
ProRation of actual expenses – If the automobile used is not 100% business use, then you don’t get to use 100% of the actual expenses. For example, 50% business use means you get to use 50% of the actual expenses as the deduction. Business use % is often determined by miles.
Which is Better?
The Standard Mileage Rate method is better in the majority of instances, though certainly not in all. If you drive a vehicle 20,000 business miles and it was 100% business use, you would be looking at a mileage deduction of $10,900.
By using the actual expenses method, if you bought that same vehicle in the tax year for $40,000, you could depreciate that vehicle as well as the fuel, maintenance, and insurance expenses.
Can I switch methods?
In short, no. Once you pick a method, you are stuck with it. If you are a business with more than 5 vehicles, then you have to use actual expenses for those vehicles.
This article is intended to provide you with general information; it does not constitute any type of tax advice. The views expressed in this article are those of the author alone. For recommendations related to your overall financial and tax status, get in contact with our CEO, Josh Morphew – josh@insightful.tax.
