The IRS has two ways to calculate the business cost of a vehicle. Regardless of which method you choose, it is important that you track both your total and business mileage for the year as both methods are affected by the amount of mileage.
So why would you choose one method over the other? And what helps to determine what method is best for you?
Things to consider:
- How much do you drive the vehicle?
- Are you willing to be consistent about tracking expenses?
- How much is the vehicle worth?
- How long do you plan to keep the vehicle?
If you do not drive a lot, chances are the actual vehicle cost expense method may give you a larger deduction. The contrary is true for those who have moderate or higher mileage with little repairs.
Standard mileage is calculated by tracking the total business mileage driven and then multiplying that by the standard mileage rate that is determined by the IRS. In 2023 that amount is up to 65.5 cents per mile. You must, however, own or lease this vehicle for it to be considered. In addition, if you use the standard mileage rate in the first year the vehicle is used for business purposes, years after you can choose either method to apply. The same is not true for the actual cost expense method.
The other method of calculating vehicle expenses is through actual vehicle cost expenses. This method is calculated by adding up all the actual expenses you paid in relation to that vehicle and multiplying it by the business use percentage. Actual expenses are things like, vehicle repair costs, fuel costs, etc. The business use percentage would be the percent of business mileage related to the total mileage. So, for example, if you drove 10,000 miles total and 5,000 miles were for business use, your percentage is 50%. The total expenses you paid for the year would then be multiplied by 50%. It is important to note that if you choose to take the actual cost expense method in the first year of the vehicle being used for business purposes, you cannot later switch to standard mileage.
Both methods can be advantageous and should be considered when figuring your auto expense for the year to find the best tax deduction.
Always remember, Senter, CPA is here for you if you need any assistance.
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