When it comes to optimizing the value inherent in your tax deductions, one of the most important decisions is considering which calculation method to use on your IRS deduction form. In this article we’ll take a look at the Standard Mileage Rate and the Actual Expense Method as the two available options, breaking them down and examining their various benefits and disadvantages.
At the end of each year, the IRS determines an amount of deduction which is relevant to a variety of expense categories, including automobile business expenses, charity, moving and medical expenses. These rates are decided by analyses which are conducted by Motus. Motus breaks down data that is relevant to variable costs, taking into account things such as the price of gas and oil, services, insurance premiums, and even depreciation. Essentially, it assesses all costs which are relevant to the maintenance and operation of an automobile and the general cost per mile to drive.
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Easily the most common way to claim tax deductions if you are a contractor, small business owner, or entrepreneur is through the standard mileage rate. This method requires that you keep a comprehensive mileage log, recording your odometer readings at the beginning of each year or even between refueling trips.
Along with keeping correct mileage logs, another important thing you need is a realistic breakdown of how much mileage you do either personally or for business purposes because anything lower than 10% of your total mileage as personal is considered suspicious by the IRS. Generally, people use their vehicles for both personal trips and business trips, so this makes sense. When it comes to determining what falls into each category, it is also important to note that commuting between your workplace and your residence is categorized as personal. Any trips you make after that, however, whether they be to a client’s residence or workplace, errands related to your work, or even a business lunch, are all tax-deductible.
The below amounts are calculated as money you can claim tax deductions on per mile, which means if, for example, you do 10,000 miles worth of business trips in a year, then these amounts should be multiplied by whatever mileage rate is applicable to you.
There are four types of mileage rates that are relevant: business, charity, medical, and moving mileage rates.
Let’s take an example. Steve works as a plumber and does 14,000 business miles during the tax year. He also does 3,500 miles personally, though these miles are obviously not tax-deductible. Under 2023’s standard mileage rate of 58.5 cents, Steve would qualify to deduct $8,190 in tax, provided of course that he had logged all of his mileage and had a presentable printable mileage log to do that.
If accurate logs are something you need help with, you can use MileageWise’s application – it operates with both a phone-based app for automatic tracking and a web dashboard where you review all your trips or modify them very easily.
Examining another example of deduction, let’s take a look at how the standard mileage rate might apply to charity work. Sabrina works for a charity that helps homeless people – she does a lot of driving between various shelters and areas of the city. If Sabrina does 5,000 miles in a year in this way, then she would qualify for $700 in tax deductions (using the 14-cent rate).
This method focuses on itemized deductions based on actual costs. More specifically, this means all kinds of vehicle-related expenses in a general sense – every cost connected to your vehicle needs to be proven through receipts.
It is also notable that if you do choose the actual expense method the first time you register your vehicle for business purposes, you have to use this method for the full duration of your lease, or however long you own that car.
That’s why it’s best to do your research first – figuring out what method is best for you.
The following list is a breakdown of all the relevant items you must retain receipts for under the actual expenses method:
Ultimately, the decision depends on exactly how many expenses you have related to your car. If you have a more expensive car that requires a lot of maintenance and additional costs, then it is likely that the actual expenses method is best. Conversely, if you are looking for a simple method where all you have to do is log your mileage, or you’d like to have the option to switch to the other method after the first year of use, the standard mileage rate is optimal.
The IRS keeps a full record of all mileage rates on their website.
However, if you find yourself being audited for a past tax year, some software can help you. In this instance we would suggest MileageWise – they have an app that not only lets you log your mileage concisely and intuitively, but it also makes it possible to reconstruct retrospective mileage logs, which automatically takes into account the IRS’s past rates.
MileageWise offers one of the best apps on the market currently.
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Disclaimer: The information provided on the website is only for informational purposes and is not intended to, constitute legal advice, instead of all information, content, and other available materials.