Are you a sole proprietor who uses a personal car for business activities? You may be wondering which is a better deduction at tax time: the standard mileage rate, or actual expenses. I’m a big fan of the standard mileage rate. Here’s why.
Tip 1 – It’s Easier: To figure the standard mileage rate deduction, you just need to know the number of business miles driven during the tax year. To figure the deduction for actual expenses, you need to know the total of those expenses, then somehow determine the business portion of them. Usually, this is done by determining a ratio between the number of personal miles vs. the number of business miles. So in order to accurately determine the expense, you need to know the business miles anyway. Why go through the extra step of keeping track of actual auto expenses if you don’t have to?
Tip 2 – It’s More Flexible: As a general rule, it is usually better to take the standard mileage rate the first year you put a car or truck into service, rather than actual expenses. This allows you some flexibility in subsequent years, because you can choose which to take after that – actual expenses OR standard mileage rate.
Sometimes it might be better to take a section 179 deduction on the vehicle the first year it is placed in service. When this is done, the taxpayer has made the election to take actual expenses that year. This is an important election that must be considered carefully! Taking a section 179 deduction sometimes allows for more tax savings over a period of years. But not always. It depends on how long you own the car and use it for business.
Tip 3 – It’s More Flexible, Again! The reverse is not true. If you take actual expenses the first year you put a car or truck into service, you must continue to use actual expenses thereafter. Again, remember this when taking a hefty Section 179 deduction the first your vehicle is placed in service. Make sure it will be worth it in the long run.
In order to determine this, you will need to estimate how long you plan to use this particular car for business, and how many miles for those years you will drive it for business. With this information, you can estimate the mileage deduction over a period of future years. Then you can see if taking the section 179 is worth it or not.
Tip 4 – You Can Write Off More: Taking the standard mileage rate may allow you to write off more than the value of your vehicle over a period of years. This is true for people who drive many business miles each year, and who keep the same car for a number of years.
It works like this because depreciation is built into the mileage rate. So if you use the same car year after year, driving many business miles each year, eventually you will write off more than the value of the vehicle. And you definitely take more depreciation than you would have using actual expenses. When using actual expenses, once the depreciation deduction is gone, it’s gone.
Tip 5 – Keep Good Records: Keep a log book in your car and record the following information each time you drive the car for business reasons:
Tip 6 – It’s Easily Defended: If you get audited and you’ve kept a good log book, I can almost guarantee that your mileage deduction will remain intact. IRS auditors view mileage deductions quite seriously, and will carefully scrutinize this deduction if you return is selected for an audit. Make sure you can substantiate this important deduction with a well-maintained mileage log.
Tip 7 – Less Paperwork: When using actual expenses instead of the standard mileage rate, a certain form is needed, called a 4562. This form is needed in order to compute the depreciation on the vehicle. If you use the standard mileage rate, and don’t need to depreciate any other property, the mileage deduction will be shown on page 2 of your Schedule C.
Auto expenses represent an important deduction for most sole proprietors. Make sure you select the method that allows for the most tax savings over a period of years, and that you can support your deduction with adaquate records.