Vehicle Deductions: Mileage vs. Actual Expenses

Vehicle Deductions: Mileage vs. Actual Expenses

If you use your personal vehicle for business, you can deduct the cost. The IRS gives you two methods: the standard mileage rate and actual expenses. The right choice depends on your vehicle, your driving habits, and how much work you want to put into tracking.

Standard Mileage Rate Method

The standard mileage rate is a per-mile deduction that covers gas, insurance, repairs, maintenance, depreciation, and most other vehicle costs. For 2023, the rate is 65.5 cents per business mile driven.

How It Works

Multiply your total business miles by the standard mileage rate. That is your deduction.

Example: You drove 15,000 business miles this year. 15,000 x $0.655 = $9,825 deduction.

You can also deduct parking fees, tolls, and the business percentage of your auto loan interest on top of the mileage deduction.

Requirements

• You must use the standard mileage rate in the first year you use the vehicle for business if you want to use this method at all
• You cannot use it if you have claimed accelerated depreciation, Section 179, or bonus depreciation on the vehicle
• You cannot use it if you operate five or more vehicles simultaneously (fleet operations)

Actual Expense Method

The actual expense method requires you to track every cost associated with operating your vehicle, then deduct the business-use percentage.

Deductible Expenses

• Gas and oil
• Repairs and maintenance
• Tires
• Insurance
• Registration and license fees
• Lease payments (if leased)
• Depreciation (if owned)
• Loan interest (business portion)
• Car wash
• Parking and tolls (business portion)

How It Works

1. Track total vehicle expenses for the year
2. Calculate your business-use percentage (business miles divided by total miles)
3. Multiply total expenses by business-use percentage

Example: Total vehicle expenses are $12,000. You drove 20,000 miles total, 15,000 for business. Business-use percentage: 75%. Deduction: $12,000 x 75% = $9,000, plus depreciation on the business portion.

Depreciation Under Actual Expenses

When you own a vehicle and use the actual expense method, you depreciate the vehicle's cost over 5 years (using MACRS). There are annual limits on depreciation for passenger vehicles:

• Year 1: Up to $12,200 (with bonus depreciation) or $3,160 (without)
• Year 2: $5,100
• Year 3: $3,050
• Year 4 and beyond: $1,875 per year

Vehicles over 6,000 pounds GVWR (SUVs, trucks) are not subject to the luxury vehicle caps and may qualify for full Section 179 expensing.

Mileage vs. Actual: When to Use Each

Standard Mileage Rate Is Better When:

• You drive a fuel-efficient or inexpensive vehicle
• Your vehicle is older and fully depreciated
• You want simple record-keeping
• Your actual costs are relatively low

Actual Expenses Are Better When:

• You drive an expensive vehicle with high insurance and maintenance costs
• You have a newer vehicle with significant depreciation available
• Your vehicle is heavy (over 6,000 lbs GVWR) and qualifies for Section 179
• Your fuel costs are high

The Heavy Vehicle Strategy

Vehicles with a gross vehicle weight rating over 6,000 pounds -- many full-size SUVs, pickup trucks, and vans -- are exempt from the luxury vehicle depreciation caps. Under Section 179, you can potentially deduct the entire purchase price (up to $28,900 for SUVs, higher for trucks/vans) in the year you place the vehicle in service.

This makes the actual expense method far more valuable for heavy vehicles, especially in the first year.

Mileage Tracking Requirements

Regardless of which method you use, you must track your business miles. The IRS requires a log that includes:

• Date of each business trip
• Destination (name and address)
• Business purpose (meeting with client, visiting job site, etc.)
• Miles driven

Use a mileage tracking app that records trips automatically via GPS. Manual logs work but are harder to maintain consistently. The IRS does not accept estimates or reconstructed mileage logs.

Switching Between Methods

• If you start with the standard mileage rate, you can switch to actual expenses in a later year
• If you start with actual expenses, you generally cannot switch to the standard mileage rate later (because you have likely claimed depreciation)
• If you lease, you must use the same method for the entire lease period

Commuting Is Never Deductible

Driving from your home to your regular place of business is a commute, not a business trip. Commuting miles are never deductible. However, if your home qualifies as your principal place of business (home office), then trips from home to client sites or other business locations are deductible business miles.

This is another reason the home office deduction is valuable -- it turns what would be non-deductible commuting miles into deductible business miles.