Contributed by WrenD, FreeTaxUSA, Tax Pro
If you use your car for your business (or side hustle), you may be able to save money on your taxes by deducting some of the costs of using your vehicle for business purposes. Here are some things you need to know to claim your vehicle expenses.
Business vs. Personal Use
You need to keep track of the miles you drive for business and for personal use. This is what they mean:
- Business miles: Miles for work or side hustle activities.
- Personal miles: Miles for your own things, like shopping.
- Commuting miles: Miles from home to one or more regular workplaces. For side hustles like rideshare, commuting miles are miles from home to your starting location and your last stop to your home.
Standard Mileage Rate vs. Actual Expenses Method
Let’s look at the two methods for deducting vehicle expenses: the standard mileage rate and the actual expenses method. Both have good points and understanding them can help you make an informed decision.
1. Standard Mileage Rate
The standard mileage rate is simpler, but you still need to record all your mileage.
- Calculation: The deduction is calculated by multiplying your business miles by a fixed rate from the IRS (for the yearly rate see IRS Standard Mileage Rates).
- Expenses covered: The mileage rate covers most vehicle costs that are deductible, such as gas, maintenance, and depreciation.
- Recordkeeping: Every day, write down the miles you drive for business-related errands. Keep track of the number on your car's odometer at the start and end of the year, and all your car costs. Since you have two methods to figure out your car expenses for taxes, you'll need this information to see which way gives a bigger deduction. If there are multiple vehicles used for business, you will need to track business mileage separately for each automobile.
Many people prefer claiming the Standard Mileage method, especially if they have simple mileage needs or low business miles. But sometimes, and some years, it might not be the best choice for your return.
2. Actual Expenses Method
The actual expenses method provides more flexibility but requires added record-keeping. The needed records are as follows:
- Business and total mileage: Both kinds of mileage are necessary to calculate the business use percentage. The business use percentage = business miles / total miles (business miles + personal miles + commuting miles).
- Deductible expenses: Fuel, oil, insurance, maintenance/repairs, registration fees, garage/parking fees.
- Separate recordkeeping for each vehicle: You will need to track mileage and expenses for each vehicle separately
Example: Suppose you drove 4,000 miles for business and 8,000 miles personally. The business use percentage is 33% (4,000 / 12,000). If you spent $1,400 on gas, you could deduct $462 as business use ($1,400 * 33%).
Considerations
- Leased vehicles: If you lease your vehicle, actual expenses may be more advantageous.
- Depreciation: The standard rate includes depreciation; with actual expenses, it is calculated separately.
- Switching methods: You can use either method in future years if you use the standard mileage method in the first year. If you use the actual expenses method the first year, you must use it for all following years.
Your choice of method will depend on your circumstances. Our software will help you deduct your vehicle expenses accurately based on your records. You can also get more IRS information here.
