If you are self-employed and use your vehicle for business purposes, you need to know the different methods the IRS offers to claim your tax deduction.
The two following methods are used to figure your deductible expenses:
- The standard mileage rate
- Actual vehicle expenses
The standard mileage rate is a bit easier to use because you simply need to track the dates and miles driven for business purposes. There are apps, such as Expensify and MileIQ to help you easily keep your records.
The IRS sets a “standard rate” each year and you will just multiply total business miles by that rate. The standard mileage rate is decreasing slightly in 2020 after a significant increase in 2019 (from 54.5 cent per mile in 2018 to 58 cent per mile). Here are the 2020 Standard Mileage Rates:
- 57.5¢ per mile for business use (down from 58¢)
- 17¢ per mile for medical and military moves (down from 20¢)
- 14¢ per mile for charitable organizations (unchanged)
If you used the standard mileage method the first year your vehicle was used for business purposes, you can choose to switch back and forth between methods from year to year. Each year, you will want to calculate your expenses both ways and then choose the method that yields the larger deduction and greater tax benefit to you.
Actual Expense Method
For the actual expense method, you will need to keep track of all expenses paid for vehicle use and maintenance. This will include tracking and keeping receipts for gas, oil changes, repairs, insurance, and any other fee. Additionally, if you use actual expense method the first year you use your vehicle for business use, you will be required to use this method with this vehicle going forward.
Business and Personal Use
The most important factor in either method is proper record-keeping. The law requires that you substantiate your expense by adequate records or by sufficient evidence to support your own statement. Not complying with the record-keeping requirements could result in the IRS disallowing any expenses not supported by documentation. The business use of your vehicle can have a big impact on your total business expenses, your net income and your tax burden.
If you use your vehicle for personal use, you will need to keep those miles or expenses separate from your business expenses. It is always recommended to use a single bank account or credit card for all your business transactions. Keeping those personal items separate will help you accurately track your business expenses.
Please consult with your Avizo expert on correct reporting and tracking of these expenses to ensure you are able to take the deduction.