Individuals who own a business or are self-employed and use their vehicle for business may deduct car expenses on their tax return. The two methods for claiming a vehicle deduction are:
- Standard Mileage Rate
- Actual Expense Method
Tracking all business and personal use mileage is necessary whether taxpayers use the Standard Miles Rate or Actual Expense Method for claiming the deduction.
For example, keeping a business mileage log outlining the date, destination, business purpose, and odometer reading is crucial to support these expenses. Several cell phone apps are also available to make tracking less burdensome.
Before getting into the specifics of each method, it’s important to understand what mileage falls into the “business” category. For example, mileage from your home to a regular or main job is considered commuting miles and is generally nondeductible; however, if taxpayers have a dedicated home office and no formal place of business, mileage from home to a temporary work site or to meet with a client would then fall into the “business” category. Generally, business miles are incurred when driving from one workplace to another, making trips from the office to meet clients, and driving from job site to job site.
Standard Mileage Rate
For 2021, the standard mileage rate for business use is 56 cents per mile. If taxpayers wish to deduct car expenses using the standard mileage rate, this method must be applied in the first year the vehicle is used for business. In subsequent years, taxpayers may switch to the actual expense method. A mileage log must be kept substantiating business use, but receipts for expenses are not required.
Actual Expense Method
If taxpayers choose to use the actual expense method, receipts for expenses must be kept in addition to a mileage log. Common actual car expenses include depreciation, licenses, gas, oil, tolls, lease payments, insurance, parking fees, repairs, and tires. If the actual expense method is used, taxpayers cannot switch to the standard mileage rate in later years for the same vehicle.
Deducting car expenses can be valuable. When first using a vehicle for business use, it’s important to consider both methods and determine which results in the larger deduction. Our tax team at Bland & Associates, P.C. can help you determine what makes the most sense for you. If you have more questions, please contact us today.
Danie Senske, CPA, Tax Director