Standard Mileage Vs Actual Expenses Tax Deduction
If you find yourself using your vehicle for work, you’ll need to know how to deduct some of those expenses from your taxes. The IRS offers two ways of doing that. They are the Actual Expense method and the Standard Mileage Rate method. Each one has its own pros and cons, and they both give different results than the other. If you use your vehicle for business, you’ll want to know about each method. By doing so, you’ll be able to choose the one that gives you larger deductions each year. Keep reading to find out more!
Here’s What We’ll Cover:
Understanding the 2 Types of Expenses
If you’re using your vehicle for your small business, it is likely that it’s one of your largest business expenses. There are two types of expenses related to your vehicle that you’ll need to know. These are common operating expenses and vehicle expenses. Each one consists of different standard costs.
Common Operating Expenses
These are the expenses that are incurred by ride-share drivers, or ride-share business owners. They consist of the following items:
- Wireless plans
- Passenger treats
- Parking fees, tolls
- Phone, necessary accessories
All of these are items or bills that you’ll use daily as a ride-share employee or business owner.
Vehicle expenses are all of the costs that are associated with your vehicle itself. They can be calculated by using the Actual Expense method or the Standard Mileage method. If you plan on using the Actual Expense method, you’ll need to document how much you use the vehicle for business. It’s a bit more difficult than the Standard Mileage method, but it can also mean bigger tax deductions if done right.
The Actual Expense Method
The Actual Expense method is exactly what it sounds like. You’ll be tallying all of the actual costs that you encountered in the year that you used your vehicle. These expenses will have to be business-related to qualify for tax deductions. The following items are all eligible for tax deductions if used for business purposes:
- Lease payments
- Automotive insurance
- Fuel for the vehicle
- Vehicle maintenance (oil changes, tire rotations, brake jobs, etc.)
- New tires
- Registration fees, title, and licensing
- Vehicle depreciation deduction
If you haven’t kept track of which of these items have been business-related, have no worries. You can determine the business percentage of the items by estimating how much the vehicle is used for business. To do so, you add up all of the operating costs for the year, then multiply them by the percentage that you use the vehicle for business. For example, if roughly half of the vehicle’s time is spent being used for business, you will multiply all actual vehicle expenses by 50%.
Tips for Using the Actual Expense Method
If you’re going to pursue the actual expense deduction, there are a few things you should consider.
- Keep all of your expense documentation. This includes receipts, service records, etc.
- Consider opening a bank account dedicated to business expenses. This account can be used solely when you’re using your vehicle during business miles.
The Standard Mileage Method
If you’re looking for the simplest way to determine your deductions, you’ll want to use the Standard Mileage method. It doesn’t require you to keep extensive documentation to determine your deduction. The standard mileage deduction takes all of the business mileage for a year and applies a standard cost to it.
To determine your business mileage for the year, you’ll need to know how many miles the vehicle has been driven in a year. Then you’ll determine how much of the vehicle’s time is spent for business purposes. If the vehicle is used for business half of the time, multiply the annual miles by 50%. Then, multiply those business miles by the standard mileage rate. Right now, the standard mileage rate is 57.5 cents per mile. Once you’ve done the math, you’ve got your standard mileage deduction.
Tips for Using the Standard Mileage Method
If you’re using the standard mileage method for your deduction, take a picture of the odometer on New Year’s Day. Then, at the end of the year, you’ll know exactly how many miles you drove for the year. You can also use a mileage tracking app to keep a more accurate figure. This eliminates the need to estimate your business mileage, and provides documentation!
If you’re looking for larger deductions this tax year, it’s important to know both methods for vehicle expenses. Depending on your situation, as well as the documentation you keep, you may get very different figures with each method. Try calculating your expenses each way, and choose the method that gives the larger deduction!
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