Should You Use Actual Expenses or the Standard Mileage Rate for a Tax Deduction for Business Use of Your Vehicle?
Whether you use the standard mileage rate or actual expenses to claim a tax deduction for business use of a vehicle generally depends on which method gives you the biggest deduction and the recordkeeping you are willing to do. In either case you will need to keep track of your mileage, either to apply the standard mileage rate or to determine the percentage of personal and business, medical or charitable use of your vehicle. The IRS imposes certain rules on how the two methods can be used.
When you can use the standard mileage rate
If you choose to use the standard mileage rate for a vehicle you own, you must use it the first year the vehicle is available for business use. In later years you can use either the standard mileage rate or actual expenses. If you lease a vehicle and use the standard mileage rate, you must continue to use the standard mileage rate for the entire lease period.
If you have claimed a depreciation deduction for business use of a vehicle under the Modified Accelerated Cost Recovery System (MACRS) or if you claimed a Section 179 deduction for a vehicle, you cannot later use the standard mileage rate for business use of the vehicle. And you cannot use the standard business mileage rate for more than four vehicles you use simultaneously.
If you use the standard mileage rate and later switch to actual expenses, for depreciation purposes you have to estimate the remaining useful life of the vehicle and use straight line depreciation.
Interest and property taxes
The interest on a loan to purchase a vehicle and the property taxes on the vehicle are considered separately and are not included in the standard mileage rate. If you are an employee, you cannot deduct the interest you pay on a car loan even if you use the car 100% for business. But if you are self-employed, you can deduct the interest for the percentage of business use of the vehicle. If you are an employee, you can deduct state and local personal property taxes on a vehicle as an itemized deduction. If you are self-employed you can deduct the percentage of the property taxes on the vehicle applicable to business use of the vehicle as a business expense.
Parking fees and tolls
If you use the standard mileage rate you can also deduct business-related parking fees and tolls. But parking at your place of work is considered a non-deductible commuting expense.
Standard mileage rates
According to the IRS, the standard mileage rates starting January 1, 2011 for a car, van, pickup, or panel truck are 51 cents per mile for business miles, 19 cents for medical or moving purposes, and 14 cents for miles driving in service of a charitable organization.
Actual expenses
If you use the actual expense method, you must determine the percentage of business use of the vehicle, based on mileage, and apply that percentage to your total expenses related to the vehicle. You can deduct the costs of gas, oil, insurance, repairs, tires, licenses, registration fees, tolls, parking fees, garage rent, and depreciation, including a Section 179 deduction, or lease payments. Fines you pay for traffic violations are not deductible.
As indicated on BizTax Advisor, using the standard mileage rate may be easier to defend in case of an IRS audit. But the actual expense method could result in a higher deduction if you have a high value vehicle and claim accelerated depreciation the first few years you use the vehicle for business. You may also have higher insurance costs, depending on the vehicle and where you live and work. Also, if you spend a large amount on repairs, you may also get a bigger tax deduction by using actual expenses.
Sources:
"Is the IRS Mileage Method Right for You?" -- BizTax Advisor
"IRS Announces 2011 Standard Mileage Rates" -- IRS
"Publication 463: Travel, Entertainment, Gift, and Care Expenses" -- IRS
Published by Kevin Hagen
Born in Minnesota, USA in 1955; studied Business Administration - Accounting, graduating in 1977 and obtaining CPA license. Worked in corporate accounting environments, eventually becoming a technical trans... View profile
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