How Self Employed Taxpayers Can Deduct Their Vehicle Expenses

*Our definition of solo entrepreneurs includes small business owners, freelancers, independent contractors, sole proprietors, and single member LLCs

Standard Mileage vs. Actual Expense Method

You drive your vehicle around for your business, whether it is meeting clients, picking up office supplies or attending a networking event. And you may be able to write off some of your vehicle expenses on your taxes because of that. But you must meet specific criteria to be able to deduct your expenses.

There are two methods available for business owners and freelancers deducting expenses related to vehicle expenses.  They are the standard mileage rate and the actual expense method.

Here are 3 simple tax rules for using either method to deduct your vehicle expenses and save money on taxes.

 Rule 1:  Keep accurate records. Maintain a trip or mileage log to record your vehicle usage. There are apps available that can help you keep track of your mileage.  Mile IQ and QuickBooks Self- Employed both offer mileage trackers.

 Rule 2: Allocate business/personal use. You will need to keep track of the number of your business and personal miles driven. One way to do this is to record your business mileage and subtract it from your total annual mileage shown on your odometer for the year. 

 Rule 3: Choose a deduction method You can use the standard mileage method or the actual expense method.  You will want to select the method that gives you the larger tax deduction. It is a great idea to run the numbers using both method and then pick one.  Keep in mind that there are some limitations to switching back and forth between methods.  

 Let’s look at some of the differences between the standard mileage and actual expense methods quickly.

 What is the standard mileage method? 

 This method requires you to calculate the total of miles you’ve driven for your business in the tax year  and multiply it by the standard mileage rate. The standard mileage rate for the 2021 tax year is 56 cents per mile.  So, if you drive a total of 5000 miles for your business or freelance work, you may qualify for a business tax deduction of $2800.

 The Standard Mileage Rate

 The Standard Mileage Method is the simpler method of calculating the business use of your vehicle.  It usually does not require you to keep receipts of gas, repairs, or other vehicle related expenses. More than 90 percent of our clients use the mileage method because of its simplicity.  Also, in most cases, it can be a tremendous tax deduction.

Please keep in mind all taxpayer’s circumstances are different and there are several factors for you to consider when determining the best method for your situation.

 Be sure to note that you cannot use this method if:

• You used more than one vehicle in your business simultaneously.

• You’ve used the actual expense tax deduction and claimed accelerated depreciation deduction in previous years.

• You have claimed a Section 179 deduction on your vehicle.

But if you use this method, there are some things you can’t deduct, like:

• Lease payments

• Actual Depreciation

• Your actual auto expenses

Now, how about the actual expense method?

 The second method you can use on your taxes is the actual expenses method. It requires more record keeping but may be worth it for some taxpayers. For most newer cars, this method may generate a larger deduction.

 Here are some deductions you can take using the actual expenses method. You are required to keep records and receipts of all your vehicle expenses if you use this method.

• Vehicle depreciation.

• Interest on a vehicle loan.

• Registration fees and tax.

• Parking fees and tools.

• Lease payments.

• Insurance.

• Gasoline.

• Maintenance.

• Repairs.

You can only deduct the percentage on your taxes that correlates to how much your vehicle was used for your business. So, for instance, if you use it for business 70% of the time, you can only deduct up to 70% of your vehicle expenses on your taxes.

Whatever option you’re considering for your taxes this year, let Tax Charm help you navigate the choppy waters of tax preparation! We’re always here to help!

Please keep in mind that this blog article or any information contained on our website is not legal or professional advice.