If you drive your car for business, as many business owners do, there are two ways to write-off the cost of driving: deduct your actual costs or rely on an IRS-set mileage rate. Either way, you’re in for savings now.
Standard mileage rate
Whether you own or lease your vehicle, you can use a per-mile rate that’s fixed annually by the IRS to figure out your deduction for business driving. Using the standard mileage rate relieves you of the need to keep track of car costs throughout the year.
Because of the increase in gasoline prices, the IRS raised the rate mid-year. For driving from January through June, the rate is 51 cents per mile; for driving in July through December, the rate is 55.5 cents per mile.
If you use the standard mileage rate, you can also deduct what you spend for parking, tolls and interest on car financing. However, no deduction is allowed for parking tickets and fines for traffic violations.
Caution: Using the standard mileage rate doesn’t relieve you of the need to keep records of business driving. Records must include mileage, the date, the destination and the purpose of each trip. Consider using an app for a smartphone, such as Tap2Track, to simplify this record-keeping chore.
Actual expense method
Instead of a mileage rate, you can deduct the expenses you actually pay to drive your car for business, including gas and oil, maintenance and repairs, lease payments if you lease the car or depreciation (up to a dollar limit) if you own it, insurance and vehicle registration fees.
With the agreement announced June 23, 2011, by the U.S. and 27 other countries to release 60 million barrels of oil from strategic reserves, expect to see the price at the pump decline somewhat. This should ease your expense budget. As of June 23, 2011, the average price of gasoline in the U.S. was $3.60 per gallon. Experts predict that the release of oil reserves will drive down the price even more, but by how much no one knows.
Again, when deducting your car expenses under the actual expense method, be sure to keep records of your business driving. No deduction (usually) can be claimed without them. For details, see IRS Publication 463.
Which write-off option to use?
The answer depends on the number of miles you drive, what you pay for your car, and other factors. For example, a costly lease and minimal driving favors the use of the actual expense method. Buying an inexpensive vehicle and driving it extensively for business favors the use of the standard mileage rate. Unfortunately, the only way to know which method will save more taxes is to keep great records throughout the year (including receipts for gasoline and other car-related expenses). Then you can figure the deduction both ways and use the better alternative. However, your choice in a prior year can affect this year’s write-off method.
- If you own the car, you must use the standard mileage rate in the first year. You can later switch to the actual expense method.
- If you lease the car, you must use the standard mileage rate or the actual expense method for the entire term of the lease; there’s no switching allowed.
As always, when in doubt, talk with a trusted tax advisor.