The standard business mileage rate can result in one of the biggest deduction that a small business owner can realize. Usually, the standard mileage rate will create a larger deduction than the actual costs of operating a car. The problem is that we are all to lazy to keep the required mileage log. To help I have included a link to an excel template that takes into account the yearly mileage rate changes. Before we get to that point lets make sure we understand some concepts.
Two Options of Vehicle Deductions – Standard Business Mileage Rate vs. Actual Expenses
Standard Business Mileage Rate
The standard business mileage rate changes each year based on an IRS approved study that takes into account costs of operating a vehicle. The standard mileage rate is often used because it is simple and requires less recordkeeping. You simply keep track of the business miles you drive and multiply it by the yearly mileage rate. The only expenses that you can deduct while using the standard mileage rate are interest on a car loan, parking or toll fees, and personal property tax.
Beginning on Jan. 1, 2015, the standard business mileage rate for the use of a car, van, pickup or panel truck will be 57.5 cents per mile for business miles driven, up from 56 cents in 2014. An example of this is that Tyrone drove his car 1,000 miles for his business during the year. To figure the vehicle expense deduction, multiply the business miles of 1,000 times the standard rate of 57.5 cents per mile for a total of $575. Need some help keeping organized? Try this standard business mileage rate tracker I made HERE.
Actual Vehicle Expenses
Small business owners have always had the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates These expense may include items such as depreciation or lease payments, maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insurance, and license and registration fees are included in fixed and variable costs for this purpose. See details on these rules in Revenue Procedure 2010-51.
Standard Business Mileage Rate Restrictions
If the standard business mileage rate is used then unfortunately you can’t deduct the cost of the car through depreciation or Section 179 expensing because the car’s depreciation is also factored into the standard mileage rate. This is the same for lease payments for a leased car.
In addition if you do not use the standard business mileage rate in the first year that you use a car for business then you forfeit the use of the standard mileage rate method. However if you use the standard mileage rate in the first year then you can switch to actual expense in a later year. With that said if the car is leased then you must use the standard mileage rate for the entire lease period if used in the first year. If you do the math the standard mileage rate almost always wins.