If you drive a personal vehicle for business use, you can choose to take the standard mileage rate deduction or you can deduct your actual vehicle expenses. Yet, which one is better? As with most things related to taxes, it’s going to depend. Therefore, let’s do an analysis. Which should a business owner choose? Standard mileage vs. actual expenses.
If you follow me on social media, you know that last year I was vacillating about whether or not I should purchase a new vehicle or a used vehicle. I’d run my Nissan Murano into the ground, and it was time for a new-to-me vehicle. Since I use my vehicle for business purposes, I wanted to make a wise decision. Ultimately, I ended up buying a new vehicle – a Ford F150 pick-em-up truck (as my grandma would say). I love it. Love it, love it, love it.
But now here I am, preparing my taxes. Yes, it’s June, and I’m just now preparing my taxes for 2018. I filed an extension so I could help my clients get their taxes done first. Mine will come last. Anyway, I’m finally working on my own taxes, and I’m trying to figure out if I should take the standard mileage rate deduction or use the actual expense method. So I’m going to go through these calculations with you. I want to show you how I made my decision and teach you how to do this yourself.
In 2019, the IRS allows you to claim 58¢ per mile that you drive for business. Thus, you’re going to multiply the number of business miles you drive each year by 58¢ to determine your allowable tax deduction.
Let’s say, then, that you drive 1,000 miles for business in 2019. You would multiply 1,000 miles by 58¢ and get a deduction of $580. Not bad. If you drove 10,000 miles, that means you would get a deduction of $5,800. Even better, right?
Just remember, that 58¢ doesn’t grow every year. In fact, it goes down sometimes. For instance, in 2016 the mileage rate was 64¢, but in 2017 it went down to 53.5¢. For a look at historic mileage rates, click here.
However, if you’re going to take the standard mileage deduction, you must follow certain guidelines.
Opposite of the standard mileage rate deduction is what’s called the actual expense method deduction. To use this tax deduction, you must keep track of what it costs you to maintain and operate the car when you use it for business purposes. The IRS says that you can include costs for “gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.” Thus, if you use your car for business 80% of the time you drive it, then you can count 80% of each vehicle expense as a deduction.
Ultimately, I want to know which option will save me the most money in taxes. Isn’t that what every business owner wants? So which is right for you? Will you get a greater tax deduction by claiming standard mileage rates or by bundling actual expenses? Let’s weigh the options.
So I’m looking at standard mileage vs. actual expenses in my life. I’m weighing the pros and cons. Ultimately, though, it comes down to my own calculations. Here’s my thinking.
I’m predicting that I’m going to keep my new truck for about 10 years. That’s about how long I’ve kept all my other vehicles. I’m also going to assume that I’ll drive 20,000 business miles a year. IF the mileage rate stays at 58¢ and IF I drove 20,000 miles a year for 10 years, I would get a tax deduction of $11,600 per year. After 10 years of this, I’d have roughly $116,000 worth of deductible expenses against my taxes.
Truthfully, I don’t know for certain how much I’ll pay for vehicle care and maintenance over the next 10 years. However, since I know what type of vehicle I’m driving, I can estimate costs for fuel, oil, repairs, maintenance, depreciation, license and registration, tires, insurance, etc. Based on my calculations, my expenses will be approximately $134,000 over 10 years. Therefore, it may make more sense for me to claim actual expenses because I can generate a greater deduction over the ten-year time frame.
You can see the year by year comparison here:
Now, if I drive more than 20,000 a year – let’s say I drive 26,500 miles a year – it may make more sense for me to take the mileage deduction because I could claim approximately $153,700 over 10 years. If the IRS raises the mileage rate up to 60¢, then I don’t even have to drive that many miles. If they lower the rate down to 47¢ or so, I’d have to drive more than 26,000 miles for that deduction to make sense for me.
After doing the calculations above, it looks like I should take the standard mileage deduction because I put close to 30,000 business miles on my vehicle each year. However, there’s a personal exception I haven’t figured into my calculations. Last year, in 2018, I made some money and I purchased my vehicle. I need to lower my taxable income, and I can generate a greater tax benefit to myself by deducting my actual vehicle expenses than I can by taking the standard mileage deduction.
Even though I may receive fewer tax benefits over the 10 years I plan to use my vehicle, I need the tax deduction the actual expenses will generate for me this year. I realize that if I claim the actual expenses this first year of vehicle ownership, I’ll have to claim them every year, but that’s what I’ll have to do. That’s a decision I’m making as a business owner.
You’ll have to make a decision, too. You may do your due diligence and calculate standard mileage vs. actual expenses. The numbers you total may tell you to pick one or the other. However, your personal circumstances may interfere with your calculations. You may need to expense your costs this year to lower your taxable income. Maybe you take the standard mileage rate this year and save the actual expense deduction for next year when you know you’re going to need new tires and a new transmission. If you’re unsure of what to do, talk to your tax advisor. He or she can help you navigate these muddy tax waters.