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Standard Mileage Rate vs Actual Expenses - Houston Business CPA

I was asked today, what expense item is handled wrong most often by SMB's (small to mid size businesses). That was easy for me to answer......deduction of vehicle expenses. What is logical to most business owners is not what the tax code says you have to do, so it is easy to mess up this deduction.

Two Methods You Can Use
There are basically two methods to deducting your vehicle expenses... Standard Mileage Deduction and the Actual Expense Method. Both of them have their own unique rules to follow, but with each method, you have to document your business usage. No documentation equals no deduction when the IRS audits your tax return..... so document your mileage

The Standard Mileage Deduction
There are some restrictions regarding when you can use the standard mileage deduction, but using the standard mileage deduction simplifies record keeping and can get you a greater deduction than the actual cost. Under the standard deduction method, there is no need to keep gas receipts, repair bills, etc. You simply total your business miles for the year and apply the IRS standard mileage rate which is 56.5 cents per mile for 2013.

You cannot use the standard mileage rate if you:

  • Use five or more cars at the same time (as in fleet operations),
  • Claimed a depreciation deduction for the car using any method other than straight line,
  • Claimed a Section 179 deduction on the car,
  • Claimed the special depreciation allowance on the car,
  • Claimed actual car expenses after 1997 for a car you leased

What does the Standard Mileage Rate include?
The standard mileage rate of 56.5 cents per mile (for 2013), includes most of the cost of operating the car - depreciation, repairs, gas, oil, etc. You can still deduct tolls & parking expenses (fees to park your car at your place of business are not deductible). Depending on how your business is structured you may also be able to deduct interest paid on the car loan.

If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. In later years you can choose to use either the standard mileage rate or actual expenses. Once you use the actual expense method though, you cannot go back to the standard mileage rate. Also, if you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.

What can I deduct with the Actual Expense Method?
If you're using the actual expense method you can deduct all the expenses of operating the vehicle - but only expenses incurred for business use. This includes gas, repairs, insurance, lease payments, depreciation, etc. But you'll have to maintain records and keep the receipts of all the expenses. If you lose your receipts and you're audited the IRS can disallow the expenses.

If you use the vehicle 70% of the time for business and 30% for personal, you will only be able to deduct 70% of the actual expenses.

Which one is best for me?
I'd like to tell you there's one an easy answer, but, for the most part, there isn't. Each businesses situation will be different, so if you have questions on which method to choose, please contact us.

Whichever method you use you'll still have to record the details of your mileage - date, mileage, business destination and business purpose. If you do not and you're audited there's a good chance your deductions will not be allowed.

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