Standard Mileage Rate Deduction vs Actual Vehicle Expenses in 2023

Mileage Rate: For upon |Whether you use your car on a daily basis or just periodically for business, you may be eligible for a tax deduction on gas, repairs, maintenance, and other vehicle costs.

We highly recommend using a mileage tracker app like Hurdlr to have that information ready for tax season. With the Hurdlr, you can track mileage, business expenses, deductions, and commissions. Click here to get the Hurdlr app on iOS or Android for free.

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What is the Standard 2023 Mileage Rate?

The standard mileage rate is issued each year by the IRS. This rate is used to calculate the amount that you can take as a tax deduction to reimburse you for business-related car expenses like gas, repairs, insurance, and vehicle registration. In addition to taking the standard mileage rate deduction, you can additionally deduct any business-related parking fees and tolls.

The tax deduction allowed is based on the total miles driven for business purposes. For 2017, the standard mileage rate for business is 53.5 cents (down from 54 cents for 2016).  Let’s walk through an example of how to calculate your tax deduction using the standard mileage rate.

Standard Mileage Rate Example

Let’s say that you drove a total of 15,000 miles this year (including business and personal mileage). According to your business mileage tracker smartphone app, you drove a total of 6,500 miles to see clients and attend a couple of business conferences. Here is how you would calculate your tax deduction using the standard mileage rate method:

6500 X .535 cents per mile = $3,477.50

What Are the 2 Ways You Can Deduct Car Expenses?

You can deduct car expenses using one of two methods:

1. Standard Mileage Rate Method

As illustrated above, with the standard mileage rate method. you use a standard rate set by the IRS each year (currently 53.5 cents per mile) to calculate your tax deduction for business vehicle usage. With this method, all you need to do is keep track of the total miles that you have driven for business and the total miles that you have driven for personal use.

2. Actual Car Expense Method

The second way that you can deduct car expenses is called the actual car expense method. In addition to keeping track of the total miles you have driven for business and personal reasons, you will need to keep good records of all receipts and other documentation that includes the amount, date, and description of the costs you plan to claim as a deduction.

These costs include but are not limited to parking fees, tolls, gas, and repairs. With this info, you will calculate the percentage of time the vehicle was used for business and multiply that percentage by the total car expenses that you had for the year. In the What is the actual expense deduction section, we will show you how to calculate this deduction.

Both methods require you to accurately track business miles. Fortunately, this is as simple as getting the right smartphone app. Check out our guide on the best mileage tracker app or try Hurdlr for free. Hurdlr actively tracks your business mileage and has auto start and stop for added precision. Best of all, it’s available on both iOS and Android for free.

Which Method Should You Use? (Pros & Cons)

In general, you should use the method that will give you the highest tax deduction. Here are some of the pros and cons of each method that Kristina M. Grasso, a Master Tax Advisor with H&R Block, shared with us:

Standard Mileage Rate – Pros

• Easier for those who do not keep good records
• Advantageous if you have a lot of business mileage

Standard Mileage Rate – Cons

• Potentially larger deduction available with the actual expense method
• Cannot be used:
  • For a fleet of vehicles (five or more used at the same time).
  • If accelerated depreciation (including bonus) or a § 179 deduction was taken the year the vehicle was placed into service.

Actual Expenses Method – Pros

• Bonus depreciation (also referred to as a special depreciation allowance) may lead to a potentially larger deduction if you have a more expensive vehicle.

For example, a car that cost $100,000 will most likely have higher gas and repair and maintenance fees than one that cost $20,000.

• If you don’t have a lot of business miles per year because all of your clients are in close proximity to you, then you will benefit more from deducting actual expenses over miles.

Actual Expenses Method – Cons

• Depreciation can be rather complicated and confusing.
• You are required to keep detailed records of every car-related expense that you wish to deduct.
• You lose the flexibility of hopping between methods if you use the actual expense method the first year you use the vehicle for business.

Do You Qualify to Use the Standard Mileage Rate?

To use the standard mileage rate deduction, you must answer yes to all of the following questions:

• Did you use the car for business reasons?
• Can you determine the percentage of time that you used the car for business reasons?
• If this is not the first year that you have taken a car deduction, did you use the standard mileage rate in the first year that you took a car deduction?

Let’s talk a bit more about each of these.

Did you use the car for business reasons?

You cannot deduct the use of your car for personal reasons. For example, even though you may drive 100 miles a week to shuttle your kids to school and all of their extracurricular activities, you cannot deduct those miles from your taxes. However, if you work as an Uber/Lyft driver when you’re not driving your kids around, then you can deduct the miles driven to take your clients to and fro because those miles were driven to conduct business.

Can you determine the amount of time that you used the car for business reasons?

This is the one requirement that people struggle with the most. As with all tax deductions, you need to be able to provide proof to the IRS that every tax deduction you claim is fact and not fiction. If you use your car for both personal and business reasons, then you must keep track of the miles driven for business versus the miles driven for personal reasons. This will be an important part of calculating the tax deduction you are allowed for your car expenses.

The good news is that there are a number of great apps that you can download to your cell phone that will keep track of every mile driven and even separate business and personal mileage for you. To learn more about the apps that we recommend, check out our Best Mileage Tracker App guide.

One app that handles mileage tracking and much more is Hurdlr. It allows you to auto-track your mileage with auto start and stop. It also enables you to manage things like commissions, expenses, and deductions with an easy auto-categorization. Click here to get the Hurdlr app on iOS or Android for free.

If this is not the first year that you have taken a car deduction, did you use the standard mileage rate in the first year that you took a car deduction?

To qualify to take the standard mileage rate deduction, you must use the standard mileage rate in the first year that you take a car deduction. Later on, if you decide to switch to the actual car expense method, you can do so. However, you cannot use the actual car expense deduction in the first year and then switch to the standard mileage deduction later on. This primarily has to do with depreciation, which we will discuss in the next section.

What is the Actual Car Expense Deduction?

If you don’t use the standard mileage rate, then you may be able to deduct your actual car expenses. The types of car expenses that you can deduct include, but are not limited to the following:

Depreciation

Depreciation is a tax deduction that you can take to recover the cost of a car that you own (it also applies to other assets like furniture and computers). In general, when you purchase a car or other asset, you cannot deduct the entire cost in the first year unless you qualify for what’s called the Section 179 deduction. The Section 179 deduction is a depreciation method that allows you to deduct up to $500,000 of assets in the year that you purchased them. To find out if you qualify for this deduction, check out our Section 179 calculator.

If you don’t qualify for Section 179, you are required to depreciate your car by spreading the cost of the car over the number of years that you expect to use it for business. For example, if you bought a car for $20,000 and expect it to last 5 years, you might depreciate a few thousand dollars each year until you stop using the car. To gain a better understanding of how to depreciate your car for tax purposes, check this out.

Lease Payments

If you lease a car that you use for personal and business reasons, you are not allowed to depreciate the car but you can deduct part of the lease payment for the time that the car is used for business. In order to do so, you will have to determine the percentage of time that you use your car for business. The best way to do this is to use a mileage tracker app which we discussed in the previous section.

Let’s walk through an example of how to calculate your tax deduction using the actual car expense method:

Actual Car Expenses Example

Let’s say that you decided to use a mileage tracker app to keep track of your miles this year. Based on the miles recorded by the app, you drove a total of 20,000 miles this year. Of those 20,000 miles driven, 10,000 were driven to see clients and to attend business meetings and a few seminars. You also have total car expenses of $5,000 as follows:

Total car expenses	$5,000
Miles Driven for business	10,000
Gas	$2500
Repairs	$1500
Registration fees	$300
Depreciation	$700

 

To calculate your tax deduction using the actual expense method, you will need to first calculate the business percentage use of your vehicle and then apply that percentage to your total car expenses for the year to get your allowable deduction. Here are the calculations:

Step 1: Calculate the % of the time the car was used for business:

10,000/20,000 = 50%

Step 2:  Multiply the business uses % from step 1 by the total car expenses:

$5,000 X .50 = $2,500

NOTE: Keep in mind that if you lease a car, then your lease payments would be included in this calculation in place of depreciation.

Do You Qualify to Use the Actual Car Expense Deduction?

To qualify for the actual car expense deduction, you must say yes to the following questions:

• Did you use the car for business reasons?
• Can you determine the percentage of time that you used the car for business reasons?
• Do you have receipts or sufficient documentation for all expenses that you plan to claim as a deduction?
• You are not going to use the standard mileage rate deduction

Did you use the car for business reasons?

As mentioned in our discussion on the standard mileage rate, you must use your car for business reasons in order to claim a tax deduction. You are not eligible to deduct the use of your car for personal things like grocery shopping and dropping your kids off at soccer practice.

Can you determine the percentage of time that you used the car for business reasons?

In order to claim a tax deduction for a car that you use for both business and personal reasons, you must be able to determine the number of miles the car was driven for business reasons. If you haven’t used a mileage tracker app, check out our top recommendations here.

Do you have receipts or other sufficient documents to prove all expenses that you plan to claim as a deduction?

If you think about it, tax filing is really based on the “honor” system. The IRS does not require that you send any supporting documents to prove that your expenses are legitimate. However, there may come a day when you will have to do just that. This is why it is extremely important to keep accurate records of the miles driven for business vs. personal. In addition, you must have receipts or other documents that show the date, amount, and description of the car expenses that you are claiming as a tax deduction. Be sure to keep these records for at least 7 years after you file your tax return.

You are not going to use the standard mileage rate deduction

As we discussed earlier, you must select only one method to deduct all car expenses. As we discussed earlier, if you start out using the actual expense method then you cannot switch to the standard mileage rate later on (however, you may switch from the standard mileage rate to actual car expense as long as you use the standard mileage rate method in the first year you take a deduction).

The Bottom Line

One of the benefits of being a small business owner is the ability to reduce your tax bill by taking legitimate tax deductions like the car expense deduction. Make it easy to keep track of mileage by downloading the Hurdlr app. Click here to get the Hurdlr app on iOS or Android for free.

The article was originally published here.

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