Last updated: February 21, 2024
What is Mileage Deduction?
First things first: Mileage deduction allows self-employed individuals to deduct the cost of business-related travel from their taxable income. But it’s not just any travel; it’s the miles you drive for your business, be it meeting a client, picking up supplies, or any other business-related journey.
Types of Deductible Miles:
- Client Visits: Driving to meet clients or potential customers.
- Business Errands/Supplies: Trips to pick up supplies, post office visits, or any other errand for your business.
- Travel to a Temporary Workspace: If you have a regular place of business and travel to a temporary work location.
- Business Events: Driving to conferences, workshops, or any business-related events.
- Commuting: The drive from home to your regular place of business.
- Personal Errands: Any travel that’s not directly related to your business.
How to Calculate Mileage Deduction
The IRS offers two methods. We’re going to cover the various ways in which mileage deduction manifests as part of various self-employed tax states, addressing the question “What can you claim on taxes?” along with other tax deductions that are common when you drive your vehicle for business and choose an expense driven method over the IRS’s standard mileage rate.
There are many tax write-offs for self-employed persons, but when it comes to mileage, you must first determine what method you wish to use: the actual expenses method, or the standard mileage rate. It is only through doing this that you can understand how to write off business expenses or how to write off a car for business in an appropriate way.
Mileage Deduction Rules for Self-Employed Workers
The actual expense method and the standard mileage rate function in very different ways. However, one thing that remains true for both methods is that you must log your mileage as a self-employed person – you also must submit comprehensive logs to the IRS that meet certain requirements.
Let’s examine those requirements:
- You must record your mileage at the beginning and end of each year. Contrary to popular myth, it is not necessary to do so every trip or even every month.
- All of your trips must be specified as either business or personal. Commuting to and from your workplace is considered a personal trip.
- Your logs must be logically consistent – meaning that they must contain no errors and your total mileage numbers need to align with your odometer readings.
The Two Calculation Methods
Let’s take a look at the actual expenses method and the standard mileage rate in more detail, addressing questions like “What can I write off on my taxes?” or “What expenses are tax-deductible?” more succinctly.
The Actual Expenses Method
With the actual expenses method, self-employed persons must keep track of all receipts relating to the operation of a vehicle, and these receipts must be itemized properly. These self-employed tax deductions are numerous, so let’s lay them all out.
An Overview of Self-Employment Tax Deductions
Under the actual expenses method, the following expenses can be claimed – these are attributable to the portion of miles you do with your vehicle that are for business purposes:
- Car depreciation or vehicle depreciation
- Gas and oil
- Repairs and servicing
- Insurance premiums
- Car registration fees
- Licensing fees
- Lease payments
Can I Deduct the Purchase of My Vehicle for Business?
If you use your vehicle purely for business purposes, you can indeed deduct the entire cost of ownership and operation. If, on the other hand, you use your vehicle for both personal trips too, then you may only deduct the cost of its business use.
NOTE: Although the IRS doesn’t require personal trips in your mileage log, it’s strongly recommended that you include them because it will provide clarity for both yourself and the IRS since you need to separate your total business mileage, total personal mileage, and total commuting mileage for the year.
Also, logging your personal trips boosts the proficiency of MileageWise’s built-in IRS auditor function, which you need for an IRS-Proof result.
The Standard Mileage Rate
The standard mileage deduction is the most commonly chosen method for self-employed persons – it is set by the IRS for tax years (usually each December for the upcoming year ahead) and incorporates tax write-offs for small businesses and independent contractors alike.
In 2023, the rate is 65.5 cents per mile driven, which is a further increase from 2022’s mid-year change by the IRS (the 62.5 cent-per-mile rate was in effect in the second half of 2022). At present, the recently updated 2024 rates apply.
It factors in all relevant self-employed tax deductions claimable under the actual expenses method – taking a general approach to the cost involved in the operation of a vehicle.
Let’s take a look at an example:
Rebecca is self-employed as a consultant, and as part of her business, she has to visit a lot of clients and run a great deal of errands. In 2021, this meant that Rebecca did a total of 16,000 business miles – qualifying her for $9,680 in tax deductions if she does the same amount of mileage in 2022. Again, this figure incorporates the IRS’s assessment of all the current market costs of operating a vehicle encapsulated in one mileage rate.
NOTE: The charity mileage rate has steadily been 14 cents per mile, while the IRS increased the federal mileage rate for medical and moving expenses (the latter can only be used by active army members) to 22 cents per mile in 2022 (it had been 18 cents per mile for several years).
Actual Expense Method vs. Standard Mileage Rate: Which Method is Better?
What’s best depends on you and your costs. If you want to determine how to write off business expenses for mileage in an optimal way, there are several considerations to make. Firstly, what kind of vehicle do you drive? Secondly, how many costs are associated with your vehicle regularly outside of gas and oil?
To illuminate the comparison thoroughly, we’re going to use some more examples:
Adam drives a Corvette C3 – a classic by anyone’s standards. Adam drives the beast of a car to meetings he has with other entrepreneurs, being an independent investor himself. It’s fast on the road and reliable too – there’s just one issue: the car is an absolute fortune to maintain.
Most of Adam’s expenses come from servicing, insurance premiums, and the replacement of parts; which can certainly prove expensive considering that the parts on such a vehicle are hard to find. Very little of his expenses relate to actually driving the car, and his maintenance costs come out way ahead of typical independent contractors or self-employed people.
For this reason, undoubtedly his best mileage tax method is the actual expenses method – this will result in more money back from the IRS.
Sally drives her Toyota Corolla around Denver for her work as a private detective, and her work involves a lot of mileage. Most of Sally’s costs are related to gas and oil, which is partly because her Corolla is reliable and rarely needs servicing. It is because of these reasons that Sally’s best choice is the standard mileage rate – her expenses are nothing compared to Adam’s, but she does do a great deal of mileage for work.
IRS Guidelines and Requirements for Mileage Deduction: Navigating the Rules of the Road
Now that we’ve seen some examples, let’s decode the IRS guidelines to ensure your trip is as smooth and compliant as Sally’s!
1. The IRS’s Definition of Business Mileage: Understanding what the IRS considers ‘business mileage’ is crucial. This includes:
- Travel between two or more work locations.
- Visits to clients or customers.
- Drives to business meetings away from your regular workplace.
- Errands for business supplies or bank visits.
2. The Importance of a Mileage Log: The IRS requires a detailed log for deductions. Your log should include:
- The date of each trip.
- Your trip’s starting point and destination.
- The purpose of the trip.
- The vehicle’s starting mileage, ending mileage, and the total miles driven.
3. Distinguishing Between Business and Personal Drives: Personal drives, including your commute from home to your regular workplace, are not deductible. Keep clear records to distinguish between business and personal mileage.
4. Adhering to Annual Updates: Be aware that the IRS updates the standard mileage rates annually. Keep abreast of these updates, as they can affect your deductions.
5. Requirements for the Actual Expense Method: If you opt for this method, you must keep receipts for all vehicle-related expenses. This includes gas, repairs, insurance, and depreciation.
- Q: Can I claim mileage deduction for travel to temporary work locations? A: Absolutely! If the place of work is not your regular or main place of business, the travel is considered deductible business mileage.
- Q: How do I prove my travel was for business in an audit? A: Maintain a detailed log and hold onto any supplementary documentation like meeting agendas, emails arranging client visits, or purchase receipts for business supplies.
- Q: Are there exceptions to the commute rule? A: Yes. If your home is your principal place of business and you travel to another work location in the same trade or business, this travel is considered deductible.
Mileage Deduction Terminology
I believe we’ve firmly established the answers to “Why?”, but before we move on to the question of “How to deduct mileage?”, let’s explore and reaffirm the basic terminology.
1. The Role of a Deduction Tracker: A ‘deduction tracker’ is your co-pilot in the journey of self-employment. It helps you keep a vigilant eye on all deductions for self-employed individuals, ensuring you don’t miss a single tax-saving opportunity.
2. Embracing Technology with a Track Tax Deductions App: In this digital era, a track tax deductions app is like having a tax consultant in your pocket. These apps are specifically designed for self-employment deductions, offering features like real-time tracking, categorizing expenses, and even integrating with your tax software.
3. Navigating the Standard Mileage Deduction Rate: Understanding the standard mileage deduction rate is crucial. It’s the rate set by the IRS each year for calculating mileage deductions. This method often simplifies your record-keeping, as you only need to track the miles driven for business purposes.
4. Uncovering All Self-Employment Deductions: Besides mileage, there are myriad deductions for self-employed individuals. From home office expenses to supplies, and even a medical travel tax deduction if your travel is medically necessary. Every penny saved is a penny earned!
5. Gas vs. Mileage – Which to Deduct? One common query is, “Is it better to deduct gas or mileage?” This depends on several factors like the amount you drive and the standard self-employment deduction rates. Typically, the standard mileage rate is more straightforward and often more beneficial, but it’s worth doing the math each year.
FAQs for the Tax-Savvy Traveler:
- Q: How accurate does my mileage log need to be? A: Extremely! The IRS can be quite strict with mileage logs. Record the date, mileage, and purpose for each trip.
- Q: Can I use a deduction app for all my self-employed expenses? A: Absolutely! A good deduction app can track not just mileage but all sorts of self-employed expenses deduction, making tax time a breeze.
- Q: Are there any deductions I might be missing out on? A: Often, yes. Apart from mileage, don’t forget home office deductions, phone and internet costs, and even certain types of insurance.
Easy Methods of Mileage Tracking
To keep track of your mileage properly, you need a mileage log. You could use a paper-based log or Excel, but you would just be crippling yourself, wasting unnecessary time.
With MileageWise’s app, you can stay on top of your logs – we offer manual tracking and 3+1 auto-tracking methods. We’re also proud to present our more niche cutting-edge features, like our AI-based AI Wizard technology, which allows the reconstruction of your mileage log if you need to prepare patchy logs for the IRS in a timely manner.
We’d love to hear from you and help in any way we can.