If you started using the standard mileage deduction and realized that actual expenses is better for you, it may be possible to switch from mileage to actual expenses.
Why Switch From Mileage to Actual Expenses
The standard mileage deduction is standard for all vehicles. That means it’s basically an average rate that doesn’t take into account your actual cost of ownership.
Sometimes, you come out ahead using the standard mileage deduction. Usually, that’s if you have a small or mid-sized sedan.
Other times, the actual expenses method wins. Pickup trucks, SUVs, vans, and other vehicles with higher costs of ownership can come out ahead with the actual expenses method.
Another time the standard mileage deduction might fall behind your actual expenses is when you have low mileage. You might need a business vehicle but not drive it that much. However, you still have fixed costs like insurance, depreciation, and annual maintenance. So the standard mileage deduction might not cover your expenses.
The good news is that the IRS generally does allow you to switch from mileage to actual expenses.
Warning: This is a One-Way Street
Before getting into how to switch from mileage to actual expenses, it’s important to point out that this is a permanent decision. You generally can’t switch from actual expenses to mileage.
So once you switch from mileage to actual expenses, there’s usually no changing your mind and going back to mileage.
Before you make the switch, make sure you’re confident it’s a good move long-term. Don’t make the switch simply because the actual expenses method would have given you a slightly larger deduction this year if you usually win with the standard mileage deduction.
Reversing Your Original Choice for Mileage
The first year you file a tax return with a vehicle, you usually get a do-over. If you chose standard mileage and realized actual expenses is better, you can amend your tax return.
The deadline to amend your tax return to change from mileage to actual expenses is usually the extended filing deadline for that year’s tax return. For example, if you’re a sole proprietor who claimed a vehicle on your 2022 tax return due in April 2023, you typically get until the October 2023 extended filing deadline to change your mind.
Even though you can usually amend your tax return for up to three years, the three-year period doesn’t apply to a change in the method you use to claim vehicle expenses. So if it’s after the extended filing deadline:
- You can make amendments like correcting the number of miles you drove
- You generally can’t switch from mileage to actual expenses
If you missed the extended filing deadline, there’s one more option that you can use in the future.
Switching from Mileage to Actual Expenses in Future Years
If you used standard mileage in the past, you can switch to actual expenses on your future tax returns. All you need to do is select the actual expenses method when you file.
There is one catch, though. You generally need to use straight-line depreciation and can’t use accelerated depreciation.
Straight-line depreciation means you divide the vehicle’s cost by five* and deduct that amount each year. Accelerated depreciation gives you the option to deduct more in the earlier years and less in the later years according to IRS formulas.
*The average useful life for most vehicles is five years, so that’s where five comes from.
So let’s say you have a $20,000 car. $20,000 divided by five is about $4,000 in depreciation per year.
But what you think your car is worth and what the IRS thinks your car is worth might be two different things.
The IRS usually thinks your car is worth:
- What you paid for it
- Minus depreciation you claimed under the standard mileage deduction
- Minus your car’s salvage value (because even if you wear out your car completely, you can still sell it for salvage)
For depreciation under the standard mileage deduction, the IRS actually has two standard mileage rates. The standard mileage rate that you deduct and a portion of that accounts for depreciation. In 2023, the standard mileage rate is 65.5 cents per mile, and 28 cents of that is for depreciation.
You can look up the salvage value in the Kelley Blue Book or other recognized sources.
So let’s say you bought that car for $20,000 and it has a salvage value of $5,000. You’ll actually be depreciating $15,000.
Now let’s say that you claimed the standard mileage deduction in year one and $3,000 of your standard mileage deduction was for depreciation. You now have $12,000 left to depreciate.
In year two, you want to switch to actual expenses. Since a car depreciates over five years and you already depreciated it one year, you have four years left. The $12,000 divided by four is $3,000 in year two and each of the following years.
Again, these are just rough numbers to give you a general idea of how switching from mileage to actual expenses works. Talk to your accountant to get a better idea of the exact numbers for your situation.
Avoiding the Need to Switch
Not realizing that the actual expenses could save you more is one of the pitfalls of using tax filing software if you don’t know all the ins and outs of taxes. And if you missed tax savings on this issue, you might have missed tax savings on other parts of your tax return. Filing with a tax pro helps you avoid these types of situations.
