A sole-proprietor who uses their vehicle for work-related reasons – no matter how often – is eligible for a mileage tax deduction.
But what in the world does that even mean?
A mileage tax deduction is the amount you deduct from your taxable income, calculated by summing up all the expenses accrued for operating your personal car for business purposes.
As a self-employed person who has to frequently meet clients and run other business errands, taking advantage of this tax break can save you some serious cash.
When it comes to claiming mileage on taxes, there are two methods you can use:
📒 The standard mileage rate
🧾 or the actual vehicle expenses
But how do they work and which of those IRS-permitted methods of calculating mileage tax deduction is best for a self-employed individual?
I’ll answer those questions and more in this handy guide.
Let’s get started!
Standard Mileage Rate vs. Actual Vehicle Expense – Which Method is Better?
There are certain benefits to both methods of calculating mileage for taxes.
Depending on how often you use your vehicle for business reasons (and the vehicle itself), a method that gives you a lower deduction this year might save you more the following year.
In other words, there is no clear answer.
Here are brief overviews of both, along with their pros and cons, to help you make a financially-sound decision:
1. Overview of Standard Mileage Rate
In this method, you calculate your mileage write-off by taking the total number of miles you drove for business purposes the entire year with a fixed number of cents specified by the IRS for that year.
The IRS rate for mileage deduction (i.e., that fixed number of cents) fluctuates every year, based on factors like gasoline prices.
Here’s how the rates have changed over the last 5 years:
|Year||Rate per Mile|
Calculating your deduction using this method is fairly simple.
Let’s say you drive a total of 30,000 miles in 2021, with 15,000 miles driven for business – your total tax deduction would be 15,000 miles x 56 cents =$8,400.
Pros and Cons of Using the Standard Mileage Rate Method
Here’s why you’d want to prefer using this method:
- The amount is easy to calculate
- Mileage logs are easier to keep
The only major drawback is that you might get a larger deduction if you opt for the actual vehicle expense method (more on that shortly).
As a general rule of thumb, you should use this method if you drive a small or an inexpensive car that doesn’t burn much fuel and is cheaper to maintain/repair (and you make a lot of business trips throughout the year).
2. Overview of Actual Vehicle Expense
As the name suggests, the actual vehicle expense method factors in the actual total cost of using your car for business.
This factors in the following expenses:
- Maintenance and repairs
- Parking and toll fees
- Lease payments
- Registration fees
You have to note down all of those expenses, carefully determine how much of it was attributed to business trips, and add it all up.
For example, if you accrue $8,000 in vehicle costs, out of which 50% can be attributed to trips made for work, your total deduction would be $4,000.
Pros and Cons of Using the Actual Vehicle Expense Method
The only benefit of calculating your mileage tax deduction using this method is that you may end up with a much higher deduction.
However, it can be difficult to log, track, and calculate all of the expenses incurred throughout the year (it’s not as simple as using a mileage tracker).
As a rule of thumb, self-employed workers who drive relatively expensive cars (SUVs, etc.) and don’t make business trips that often are better off sticking with this method.
Best Approach: Calculate the Final Figures and then Decide (Conditions Apply)
You can calculate how much mileage tax deductions you’re eligible for under both methods, compare them, and pick the one resulting in a higher amount – as long as you meet certain IRS conditions.
You’re free to switch between the standard mileage rate and the actual expense method if:
- You use the standard mileage rate in the first year you use your vehicle for business. If not, you’ll have to use the actual vehicle expense method forever for that particular vehicle.
- Your vehicle isn’t leased. For leased vehicles, you have to use the standard mileage rate for the entirety of the lease period.
If you’re eligible to switch between methods, crunch the numbers, see which method offers a higher deduction for that year, and use that.
And unless you start using a different vehicle for business, repeat the process the next year.
Wrapping it Up
Calculating tax deductions can be a hassle, especially if you’re self-employed.
However, including these deductions on your Schedule C Form-1040 can certainly add up in your annual savings.
If you’re looking for an easy way to sort your qualifying expenses (such as mileage write-offs) and maximize your tax deductions, you’re in luck.
Freely – an all-in-one accounting software made especially for freelancers like you – offers instant write-offs, bookkeeping, and more, allowing you to create tax schedules for your business in just 10 minutes per month.
Jump on the waiting list today and become one of the first to experience the convenience of using Freely!Tax deductions