Driving down your taxable income
If you’re self-employed, you face a double whammy of federal taxes—income tax and self-employment (Medicare and Social Security) tax. Both of these taxes are affected by your business’s net profit. If you use your car substantially for your business, you can drive your profit down by deducting expenses related to the business use of your car.
The IRS offers two approved methods of determining your deduction for the business use of your car:
- Actual Expenses or
- Standard Mileage
The two methods can produce very different results in any given tax year, depending on a variety of factors. Based on those results, you might use one method one year and use the other method the next. However, if you want to have the option of switching back and forth between the methods, you must use the Standard Mileage method for the first year you take the deduction for the business use of a particular vehicle. After that, the choice is yours.
Because your circumstances may vary from year to year, you’ll want to compute the deduction using each method and then use the one that yields the bigger deduction. Below are details about each method.
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Computing Your Standard Mileage
Calculating the expense for the business use of your car is easy when you use the Standard Mileage method. All you need to do is keep a record of the business-related miles and the total miles you drove during the tax year and then multiply the business miles by the rate the IRS provides. For 2019, that rate was 58 cents per mile.
- Tip: Photograph your car’s odometer on January 1 and save it. That way you can refer to it when you do your taxes the next year.
If you use the same vehicle for personal and well as business purposes, you can only count your business miles when calculating your deduction. Keep a careful log of all of your miles, noting which ones were for business purposes. Multiply that number by the Standard Mileage Rate ($0.58 per mile for tax year 2019) to calculate your deduction amount.
- Example: You drive 10,000 miles for business. Multiply 10,000 by $0.58 to determine your Standard Mileage Deduction (10,000 miles x $0.58 = $5,800 Standard Mileage deduction).
If you use the Standard Mileage deduction, you’re not allowed to deduct specific expenses for your car, no matter how large they are. You should calculate your expenses using both methods. You might get a larger deduction by using the Actual Expense method.
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Calculating Actual Expenses
When you use the Actual Expenses method, you total up the amount of money you actually spent on your vehicle throughout the tax year. In addition to major expenses, you can also include many of the regular expenses of operating a vehicle, including:
- Auto insurance
- Lease payments
- New tire purchases
- Maintenance (including oil changes, tire rotations, brake pad replacements)
- Licensing, title, and registration fees (may vary, depending on your state)
- Depreciation of the vehicle (using a depreciation table to determine the total amount and then deducting the portion applying to your vehicle’s business use)
After totaling these expenses, multiply the amount by the percentage of miles driven for business purposes.
- Example: You have $15,000 in total vehicle expenses, and half of the miles you drive are for business. Multiply $15,000 by 50% to calculate your Actual Expenses deduction (e.g. $15,000 Actual Expenses x .50 business use = $7,500 deduction).
Sometimes it pays to bunch Actual Expenses into one tax year and then take the Standard Mileage deduction the next. For example, if you have relatively low mileage for the year but know that you need four new tires, front and rear brake pad and rotor replacements, and an engine repair, it might be best to spend the money on your vehicle before the end of the tax year and use the Actual Expenses method of computing the business use of your vehicle for the current tax year.
Alternatively, if you are nearing the end of a high-mileage year and can put off the repairs mentioned above until after the first of the year, you can benefit from a large Standard Mileage deduction for this tax year and use Actual Expenses next year.
For more ideas about Standard Mileage vs. Actual Expenses, visit TurboTax.com.