If you’re self-employed, you can generally deduct the expenses of using your vehicle to do your job. Your two options are the standard mileage deduction and the actual expenses method.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
What is the standard mileage deduction?
The standard mileage deduction gives you a fixed deduction based on the number of miles you drive. The current rates are as follows:
- 2022 (Miles for July through December): 62.5 cents per mile
- 2022 (Miles for January through June): 58.5 cents per mile
- 2021: 56 cents per mile
- 2020: 57.5 cents per mile
Due to high gas prices, the IRS recently announced an increase to the standard mileage deduction for the second half of 2022. The rates go up four cents per mile from July until the end of the year. Miles you drove through June still go by the original rate. When you file your tax return, your tax software will ask you for your miles for each part of the year instead of giving one annual total like in other years.
What mileage can you deduct?
You can deduct all of your business miles. Business miles are the miles you drive from one location to another.
For example, if you deliver food for DoorDash, business miles are from restaurants to your customers then to the next restaurant. Uber and Lyft drivers can also deduct the miles for driving around trying to find a better place to find passengers.
You can’t deduct commuting miles. Commuting miles are from your home to a job or a job to back home. You may be able to avoid commuting miles and count these miles as business by setting up a qualified home office.
Can you deduct mileage for an electric or hybrid car?
Yes, you can deduct mileage for an electric or hybrid car as long as it otherwise qualifies for the standard mileage deduction. Being electric or a hybrid doesn’t change what type of vehicle you have for the purpose of this deduction.
Can you deduct mileage for a motorcycle?
No, motorcycles don’t qualify for the standard mileage deduction. They’re a different class of vehicle and can only use actual expenses.
Can you deduct mileage for a rental car?
No, rental cars don’t qualify for the standard mileage deduction. Since you don’t own the car, you don’t have the same types of expenses. You would need to deduct the actual expenses of the rental.
What does the standard mileage rate cover?
The standard mileage rate covers all of the expenses to own and operate your car. This includes
The standard mileage rate does not include things you buy for inside of your car, like dash cams or food delivery holders. It also doesn’t include tolls and parking fees (which you can separately deduct in full during business trips).
Accounting tip: When you take the standard mileage deduction, enter the car expenses it covers as personal expenses in QuickBooks or your other accounting software.
- They won’t be business deductions since you’re taking the standard mileage deduction instead.
- If you want to track these expenses in case you want to use the actual expenses method, use separate categories from any expenses that aren’t covered from the standard mileage deduction. This will let you easily figure out what can or can’t go on your Schedule C.
How should you track your miles?
Under IRS regulations, you must keep a mileage log of your business trips in order to deduct them. A pen and paper in the car is fine, but there are also apps available that help you keep track of your mileage and other information about your vehicle.
When use use a mileage tracking app, it will automatically detect and record when you’re driving. You just need to go back later and set which trips were business and which trips were personal. If you choose a subscription-based app, the cost of the app is tax-deductible.
How and when is the mileage rate set?
The IRS sets the standard mileage rate based on current inflation data and the cost of owning a vehicle. In most cases, the IRS sets the rate for the following calendar year in late fall.
Will the standard mileage rate go up because of high gas prices?
Mid-year increases to the standard mileage rate aren’t uncommon. They’ve happened before when gas prices spiked.
A second increase in the same year would be fairly unusual. However, it’s not impossible if gas prices rise even higher.
What is the actual expenses method?
In the actual expenses method, you track your exact expenses instead of taking the standard mileage rate. The actual expenses method covers the same expenses as the standard mileage rate, so you need to choose which one you want to use.
Like other tax deductions, you need to keep receipts for everything you want to deduct.
Is it better to use the standard mileage rate method or the actual expenses method?
Most people will save more using the standard mileage rate. There is only one mileage rate covering all types of vehicles.
Most passenger cars, light trucks, and SUVs cost less to operate than what the standard mileage rate gives. Of course, you might want to track your own expenses to be sure.
How do you calculate the actual expenses method?
Just like with the standard mileage deduction, you can only deduct business trips. The way you do that is by dividing your business miles by the total number of miles you drove during the year. This means you will still need to keep a mileage log.
For example, if you drove 20,000 miles during the year and 15,000 were for business, your business percentage is 75%.
Multiply your total car expenses by 75% to get what you can deduct. For example, if you spent $2,000 on car insurance, you can deduct $1,500.
If you have business-specific expenses, like the extra cost to add business coverage to your auto insurance policy, you can deduct those expenses in full.
Can you switch between the actual expenses method and standard mileage deduction?
There are different rules for whether you can switch between the actual expenses method and standard mileage deduction.
- If you used the actual expenses method the first year you used your car in your business, you’re stuck with the actual expenses method. You can’t switch to the standard mileage deduction later.
- If you used the standard mileage deduction the first year you owned your car, you can technically switch between the two methods in later years. However, the depreciation rules are so complicated that it’s probably not worth the hassle. See IRS Publication 463 if you want to see the details.
When do you need to decide between the actual expenses deduction or standard milage deduction?
You have to choose which method you want to use by the original due date of your tax return (including extensions). Once the deadline passes, your choice is locked in. You can’t change it later even if you amend your tax return.
As a practical matter, you may need to take action sooner. For example, if you’ve been using the standard mileage method and don’t track your actual expenses during the year, you may not be able to support your deductions under the actual expenses method. If you think you might switch, track both your mileage and your actual expenses and save all receipts. At the end of the year, you can decide which way is best.
Most self-employed workers will save more using the standard mileage deduction. No matter which method you use, you need to keep a mileage log showing your business miles.