What would be wiser to use as a method to calculate deductible expenses: standard mileage rate method or the actual expenses?
If that is a dilemma you’ve been trying to solve yourself lately, then read on. It’s exactly what we’re going to discuss below. We’ll try and help you understand the pros, the cons and any restrictions, that come with each one of these options.
Businesses have their ups and downs. Trying to restrict your expenses to a tidy sum is always a wise strategy. A strategy you probably need to apply to all of your operational expenses. Especially, the ones that encumber your business the most. So, if you’re running a fleet business or just using a number of vehicles on a daily basis, you probably need to decide on the vehicle expenses deduction method you’ll use.
Business use of vehicles or business vehicles?
First things, first. Let’s see which one describes best your case. Do you use your vehicles exclusively for business purposes? Well, in that case, according to the IRS you need to deduct the entire sum of vehicle operational costs. But, in the off chance you or your drivers use your vehicles for both personal and business purposes, things are a little different. You need to decide on a method that will allow you to be eligible for tax deductions, according to your needs. And that’s with your best interests in mind.
As our title denotes, you’ve got two options to choose from. But, whichever you choose, you need to first make sure that you have supporting evidence to justify these expenses. Mileage log, related receipts etc., included. We’ll further explain, below.
So, let’s start with the first one.
All you need to know about the “actual expenses” method
According to the IRS:
To use the actual expense method, you must determine what it actually costs to operate the car for the portion of the overall use of the car that’s business use. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation(or lease payments) attributable to the portion of the total miles driven that are business miles.
You can learn more here.
(Total vehicle expenses) x(%used for business purposes) = $(business expenses)
To put it another way, you need to make sure you have all of your receipts, invoices, purchases papers or any other document for the payments, as enumerated. Once you have these expenses summed up, you then need to multiply the sum with the percentage of “business use” of the vehicle. That is, as opposed to “personal use”.
As you may have noticed by now, this method needs you to remain alert, collecting all of these receipts; and having them readily available to you, when needed.
Now, let’s see what’s different in the standard mileage rate method.
Deductible vehicle expenses with the “standard mileage rate” method: things you need to know
First of all, make no mistake, you need to produce a mileage log. One would think that, making sure you take a snapshot of your odometer at the beginning of each year would be enough. Well, it might or might not be. Can you really count on that? Regional and federal law is becoming more and more strict, by the minute. In any case, once you know the exact number of miles you have driven for business purposes you can multiply with the standard mileage rate and you’ve got the deductible amount. Note here that the IRS revises standard mileage rate each year. That means you need to calculate your deductible amount for the same mileage, each time.
(Total miles covered for business purposes) x $(Mileage Rate) = $(Total Deduction)
Note that tolls and parking fees fall into the business operating expenses category. Deduction of these expenses must be calculated separately, in both methods.
Which deductible vehicle expenses method should I choose?
As the IRS suggests,
Υou may want to figure your deduction both ways before choosing a method, to see which one gives you a larger deduction.
And so, you could make sure that you’ve efficiently gathered all related data, make calculations as needed and choose accordingly.
Does that mean I can switch between these two methods?
If you’ve been wondering whether you can change the method you use, well, you can. But there’s a tiny detail here, that you need to be aware of. You are eligible to do so, only if the first year you used your vehicle for business purposes you had applied the standard mileage rate. If your vehicle satisfies this condition, then you can switch, back and forth, between these two deduction methods.
Is there anything else I need to know?
In case you’re using leased vehicles for business purposes, you need to know this in advance. You cannot deduct both your lease costs and the standard mileage rate. As we have previously explained here, according to the IRS, you can either claim lease costs or use standard mileage rate, for as long as you lease these vehicles. In the same article, you may find useful information in case you’re thinking of adding a few leased vehicles to your fleet; or if you’re starting a fleet business from scratch, using leased fleet vehicles, exclusively.
What about deductible expenses for my employees?
Your drivers need to follow the same process if they’re using their personal vehicles for business purposes. They should collect receipts and be able to know the exact number of miles they covered in business trips.
According to the IRS:
Cents-per-mile rule. The business mileage rate for 2020 is 57.5 cents per mile. You may use this rate to reimburse an employee for business use of a personal vehicle, and under certain conditions, you may use the rate under the cents-per-mile rule to value the personal use of a vehicle Dec 26, 2019
Learn more here.
Make sure you’ve got all the information you need, to choose wisely
Tax laws change each year. Wouldn’t it better to always be aware of how many miles you — as an independent professional, as an employer or as an employee — have done? Shouldn’t you know all instances your fleet ran for business miles, vehicle by vehicle? In our humble opinion, that could be of great value, in any case. It would help you greatly in choosing the appropriate method for deduction, according to your “current” interests.
Use Veturilo, today. Have mileage logs recorded for all of your vehicles. And then, even if the mileage rates fluctuate like nothing else, you will still be able to make the best business decision for your fleet. That’s what fleet managers do! 😉