Auto Deduction: Actual vs. Mileage?
Auto Deduction: Actual vs Mileage
Auto Deductions: Actual vs. Mileage Method
This question comes up a lot: “Can I write off my vehicle and how can I maximize it without the IRS showing up at my door?” (this means, how can I do it legally)
If you’re a business owner, freelancer, or self-employed, you know the importance of tax deductions and if you use your car for business, this one’s for you.
The confusion that we often see in this discussion stems from the two ways to do it, actual method or the mileage method and what is allowed for each. So, let’s dive in.
First, what the heck is an Auto Deduction?
Before we get into the guts of this topic, let’s make sure we’re on the same page. If you use your car for business—whether you’re driving to meet clients, run errands, or haul stuff from point A to point B—you can claim a deduction for those business miles.
But the one thing we can’t stress enough, regardless of the method used, ALWAYS, ALWAYS, ALWAYS, document/track your mileage.
So, back to the topic, there are two ways to deduct your vehicle expenses:
The Actual Method or the Mileage Method. We are going to explain each and then at the end, give you 6 or 7 ways to determine the best strategy for you.
The Actual Method: Tracking the Details
The Actual Method got a turbo boost with the TCJA. Those benefits have decreased a bit in the last few years (we will discuss this) but can still be a powerful option.
- What You Deduct: You’re going to track all the expenses that come with using your car for business. That includes gas, oil, maintenance, insurance, registration, depreciation (or lease payments), and even interest on your car loan. Basically, every penny you spend on keeping your car running.
- How You Calculate: You need to keep track of the total miles driven during the year (business and personal) and then figure out what percentage of those miles were for business. If you drove 10,000 miles and 4,000 of those were for business, you get to deduct 40% of your total expenses. So, let’s say your total expenses were $6,000 for the year—40% of that is $2,400. That’s your deduction.
- The Pros: You can write off all the costs, including depreciation, which can be a big deduction for newer cars or more expensive ones. The TCJA brought 100% depreciation for vehicles over 6000 pounds (for the years 2018 through 2022 and has been decreasing since with a total phase out in 2027 unless extended) and also increased the luxury depreciation limit. We won’t be going into detail about depreciation here, but if you have questions about this, please feel free to reach out.
- The Cons: It’s a little tedious. You must track every single expense, every mile, and keep those logs and receipts. That means a lot of bookkeeping and organizing but under the right circumstances, it can be well worth it.
The Mileage Method: Simpler, But Not Always the Best
Now, let’s talk about the Mileage Method. This one’s like the “easy button” of auto deductions, and again, under the right circumstances, can be even better than the actual method. Here’s the scoop:
- What You Deduct: You get a set amount per mile driven for business. For 2024, the IRS is offering 67 cents per mile. So, if you drove 4,000 miles for business, you’d multiply that by 67 cents and get a deduction of $2,680. (This will be increased to 70 cents per mile in 2025)
- How You Calculate: Keep track of the number of miles you drove for business, personal and commuting. That’s it. No need to track gas, insurance, or repairs. Just a simple mileage count, and you’re done.
- The Pro: It’s simple. You don’t need to track every single expense, and you don’t need to sweat over depreciation or maintenance records. You just track miles and multiply by the IRS rate.
- The Con: You can’t write off things like gas, maintenance, or depreciation. So, if your car is a gas-guzzling beast or you do a ton of repairs, you might miss out on some big deductions.
So, Which Method Should You Use?
Now, the big question: Which method is right for you? Here’s the deal: it depends on your situation. Both methods have their perks and drawbacks, but you want to pick the one that gives you the biggest deduction. Here’s how you can decide:
- If you have a lot of business miles and a lower priced vehicle, mileage is probably best.
- If you have lower business miles and an average costing vehicle but drive it exclusively for business, actual.
- Low business miles with a higher costing vehicle used exclusively or primarily for business, actual will probably be better.
- Low business miles, lower costing vehicle used exclusively or primarily for business, the actual method will most likely beat the mileage method.
- If you have a day job and run a part time business, mileage is usually best.
- If you have a 6000+ lb. vehicle, the actual method usually wins.
- If you have a vehicle with high MPGs and average use/miles, the mileage method usually wins due to lower operating costs for the vehicle. Think electric cars, etc.
Final Thoughts
As anything IRS-related: there’s no one-size-fits-all answer. Each method has its pros and cons, and the right one for you depends on your unique situation. My advice? Take a few minutes to do the math. Get the mileage logs out, grab your receipts, and figure out which method works out to a better deduction. You might even want to try both methods one year to see which gives you a bigger deduction before you settle on one for the long haul. If you need help determining which is best, let us know. Book a call and see if we are a good fit.
But above all, don’t skip this! Auto deductions are legit, and leaving money on the table for some politician to waste is a terrible thing.
Now get out there and take full advantage of what’s yours! And remember what we always say:
“It’s time to use the tax code against the very people who wrote it” – Mike Henninger
