Nobody gets reimbursed for their commute to and from work. However, when your employees drive their cars for business purposes, you can reimburse them.
Similarly, when you drive for your small business, the government gives you a tax deduction. There are two ways to do this: standard mileage and actual expense. Which one should you use?
At CSI Accounting & Payroll, we’ve worked with small business taxes for over 50 years. That means we’ve spoken to thousands of people about deducting the use of their vehicles, answering questions like:
- What is standard mileage? What is actual expense?
- Is standard mileage or actual expense right for me?
- Can I switch deduction methods?
Explaining Standard Mileage & Actual Expense
When it comes to vehicle deductions, you need to choose between standard mileage and actual expense. Let’s compare the two options.
Standard Mileage Deduction
For standard mileage, you need to keep track of how many miles you drove for business purposes. (Again, this doesn’t count your commute!) You also need to make a detailed log, including the date, time, mileage, and purpose of the trip.
You can use an app to help track your miles, such as MileIQ. Then, the IRS will allow you to deduct the miles at their current rate. It’s certainly the easier of the two methods.
Actual Expense Deduction
For actual expense, much more work is needed. Not only do you still need to track your miles and keep a detailed log, but you also need to keep track of anything related to your car’s costs, such as:
- Gas
- Maintenance
- Repairs
Which Method to Use
There are three general rules that will tell you which method is better for you to use: miles driven for business purposes, percentage of vehicle use toward business purposes, and whether you’re using your personal vehicle or a company car.
Business Miles
If you drive 10,000 business miles or more per year, the standard mileage deduction may be better for you.
If it’s under 10,000 business miles per year, you may see a higher deduction from using the actual cost method.
Percentage of Business Use
You may want to use the standard mileage deduction if you use your vehicle for business purposes less than 50 percent of the time.
Otherwise, the actual cost method may be better if you use your vehicle for business purposes a majority of the time. We also recommend buying a company car in instances like this, which we’ll explain in the next section.
Personal or Company Vehicle
If you’re using your personal vehicle, you may want to use standard mileage.
If you’re using a company vehicle, you must use actual expense. Just keep in mind that if you sell your company vehicle, you need to reclaim that depreciation (which will be taxed at ordinary tax rates).
Switching Deduction Methods
Sometimes your situation can change, so you may want your deduction to change. Once you’ve been using a deduction method, can you switch to the other?
Ideally, you would stick with one method. However, it’s possible to switch.
If you start with standard mileage, you can switch to actual expense.
On the other hand, to switch from actual expense to standard mileage, you need a private letter ruling from the commissioner of the IRS (which is expensive to obtain).
Maximize Your Deductions!
If you’re still not sure which vehicle deduction is better for you, a monthly accountant can help! They work with your finances year-round to help you make the best-informed business decisions and legally minimize your taxes.
Now that you know about the differences between standard mileage and actual expense deductions, which one is better for you, and how to change methods, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about what it’s like to work with CSI by clicking the image below:
