VEHICLE EXPENSES FOR THE SELF EMPLOYED: ACTUAL VS. STANDARD MILEAGE RATE
Many taxpayers operate their businesses as sole proprietorships (aka self-employment). When a taxpayer is self-employed, income is reportable on the individual’s tax return (Form 1040), and the taxpayer is responsible for paying all taxes on this income. To properly tax only the adjusted gross income, the IRS allows taxpayers to deduct business expenses from their gross self-employment income. While there are many deductions, this article will focus only on vehicle expense deductions. The IRS outlines specific rules regarding the business deductions of vehicles in its instruction guide for each tax year. Below, we clarify the calculations, differences, rules, and tips for record-keeping in case of IRS audit.
There are two calculation options for vehicle expense deductions: Standard Mileage Rate OR Actual Expenses. You cannot deduct both mileage AND actual expenses. If you qualify to use both deductions, we recommend that you calculate your vehicle deduction with both options, then use the option that provides you with the higher deduction.
Standard Mileage Rate (“SMR”)
In 2019, the standard mileage rate was 58¢/mile. The calculation is as follows:
SMR = total business miles driven X .58 + total parking/tolls
The IRS allows you to use the SMR calculation if you meet the following qualifications. (1) You can only use the SMR if you have fewer than 5 business vehicles. (2) For leased vehicles, you can use either deduction; however, if you use SMR at any point during the lease term of the vehicle, then you must continue to use SMR for that vehicle for the remainder of the lease term. (3) For owned vehicles, you can only use SMR if you used the SMR calculation the first year that you filed taxes with this vehicle. If you did not use SMR for the vehicle the first year of including it on your tax return, then you are barred from using it in subsequent years for that specific vehicle. (4) If you use the SMR, then you cannot deduct your rental/lease payments, vehicle depreciation, or actual vehicle expenses.
Actual Expenses
If you do not deduct the SMR, then you can deduct the total of your Actual Vehicle Expenses, which include the costs of gasoline, oil, repairs, insurance, license plate fees, maintenance, etc. You can only deduct the actual cost of business vehicle expenses and must separate your personal use/expenses. If you use this calculation, then you may also deduct your business vehicle lease/rental payments and business vehicle depreciation. You must use Actual Vehicle Expenses if you operate with more than 5 business vehicles. Additionally, you have the option of using this calculation for owned business vehicles (for any tax year), or for leased business vehicles (only if you have not used the SMR for the particular leased vehicle for the current lease term).
As illustrated, you have certain rights that you may exercise. Knowing when to exercise them is crucial to resolving your tax issue. If you have tax issues, we recommend that you research as much as possible and hire additional help via qualified representatives if needed. Always make sure that you review your tax returns before filing them or request the assistance of a trusted advisor.
Record Keeping
In case your tax return is flagged for an IRS audit, we recommend that you keep copies of all receipts for vehicle expenses in a file organized by tax year and odometer readings documented by a professional from the beginning and end of each year. We also recommend that you log each business use/expense of the vehicle in a spreadsheet.
