The tax code allows most business drivers to benefit from a convenient standard mileage rate. But the fastest and easiest way isn’t always the best way.
Strategy: Compare the standard mileage rate results to your actual costs. Despite the extra recordkeeping hassles, the actual expense method may produce a much bigger annual deduction, if you switch methods at this point in the year.
Also, note that the standard mileage rate dropped a half peny in 2020 to 57.5 cents per business mile (plus business-related tolls and parking fees), down from 58 cents per mile in 2019. (IR-2019-215, 12/31/19)
When you use your vehicle for business driving, you can deduct your out-of-pocket expenditures – such as gas, oil, repairs, insurance, registration fees, tries, etc. – attributable to the business use of the vehicle used for business (subject to a small add- back for expensive vehicles). However, in lieu of writing off actual expenses, business drivers can claim the standard mileage rate deduction, which is adjusted annually by the IRS. In this case, you don’t have to keep track of all your vehicle operating expenses, but you still must document the date, place, business relationship, business purpose and mileage for each business-related trip.
The standard mileage rate method is much easier to use, but the actual expense method is likely to produce a much bigger deduction. Frequently, the key to the comparison is the annual depreciation allowance available to business drivers using the actual expense method. Depreciation is already built into the standard mileage rate.
To further tilt things in favor of the actual expense method, the Tax Cuts and Jobs Act (TJCA) hiked the limits for the depreciation deductions for so-called “luxury autos,” as well as increasing bonus depreciation available for the first year a vehicle is placed in service in 2019 and used 100% for business, the maximum first-year luxury auto depreciation is $18,100 if $8,000 of bonus depreciation is claimed.
Of course, these figures must be adjusted based on the percentage of business use, but they still provide a powerful tax incentive to go the actual expense method route.
Example: Normally, you drive 12,000 business miles a year. For simplicity, let’s say you acquired your car in January and the total depreciation allowance for 2020, including bonus depreciation, will be $15,000.
You begin keeping the records needed for the actual expense method in the second half of the year. The estimated cost of driving the car, including all expenses stated above, is 40 cents a mile. Also, you expect to incur $500 in business-related parking fees and tolls for the year.
Now let’s compare the two methods.
● If you use the standard mileage rate, your deduction for 2020 is limited to a total of $7,400 (12,000 miles x 57.5 cents per mile + $500).
● If you use the actual expense method, you can deduct $2,900 in operating expenses and parking fees (6,000 miles x 40 cents per mile + $500), plus a whopping $15,000 in depreciation, for a total of $17,900.
Result: You come out $10,500 ahead with the actual expense method ($17,900 – $7,400) even though you don’t start keeping the required records until July!