Deducting vehicle expenses can lower your tax bill if you use a vehicle for work. You have two options: the standard mileage rate or the actual expenses method. This guide focuses on how to use the actual expenses method to get the biggest tax break possible.
What are Actual Vehicle Expenses for Tax Purposes?
When you use the actual expenses method, you track and deduct the real costs of running your vehicle for your business. This includes many different costs.
Here’s a list of what counts as actual vehicle expenses:
- Gas and oil
- Maintenance and repairs
- Tires
- Insurance
- Registration fees
- Lease payments (if you lease your vehicle for work)
- Depreciation (if you own your vehicle)
- Licenses
- Garage rent (if you pay for a spot for your business vehicle)
- Parking fees and tolls you pay during business trips
It’s important to remember that you can only deduct the part of these costs that are for your business use, not your personal driving.
Actual Expenses vs. Standard Mileage: What’s the Difference?
People often wonder which method is better for deducting vehicle expenses. The actual expenses method is one way, and the standard mileage deduction is the other.
The standard mileage method is simpler. You just multiply the number of business miles you drove by a rate the IRS sets each year. For example, in 2024, the rate is 67 cents per mile for business use. This rate changes, so always check the current year’s number.
The actual expense method, as we talked about, involves keeping track of all your real costs like gas, repairs, and insurance. Then you figure out what portion of those costs is related to your work.
Switching Between Methods
You can switch between the actual expenses and standard mileage method from year to year, but there are some rules. If you use the standard mileage rate the very first year you use a car for your business, you have the flexibility to switch to actual expenses in later years for that same vehicle. However, if you start by using actual expenses and claim depreciation, you generally have to stick with actual expenses for that vehicle going forward.
How to Calculate Your Deductible Actual Vehicle Expenses
Calculating your deduction using the actual expenses method takes a few steps. It’s not difficult, but it does require good record keeping.
First, you need to track your total miles driven for the year. This includes all miles, both business and personal.
Then, you need to track your business miles. These are miles driven specifically for your work. Miles driven from your home to your regular workplace (commuting miles) usually don’t count as business miles. However, if you have a home office that qualifies as your principal place of business, driving from your home office to a client’s location is considered business mileage.
Next, you need to calculate your business use percentage. You do this with a simple formula:
Business Use Percentage = (Business Miles ÷ Total Miles Driven in the Year)
