If you use a vehicle for business driving, you have a tax choice: deduct your actual expenses or use an IRS-approved standard mileage rate. Frequently, the actual expense method will provide a bigger deduction, but it requires additional recordkeeping.

Here’s a breakdown of your options:

  • Actual expenses: With this method, you can deduct actual expenses attributable to business travel – including gas, oil, tires, insurance, repairs, registration fees, etc. – plus depreciation, subject to certain limits. But you must account for every single expense as well as keeping the other records required for the standard mileage rate.
  • Standard mileage: This flat rate, which the IRS adjusts annually, is 54.5 cents per business mile in 2018, plus any business-related tolls and parking fees. For instance, if you travel 10,000 business miles, your deduction is $5,450. You still must record the mileage for all business trips, as well as the dates, destinations, names, and relationships of business parties and business purposes.

Did you just start using a new vehicle for business?

If you buy a vehicle late in the year, the actual expense method usually provides a much larger deduction, due mainly to favorable depreciation rules.

For example, say you drive 1,000 business miles monthly, and start using a car costing $50,000 on Oct. 1. The car is used 100 percent for business, so you can claim the maximum first-year write-off allowed under Section 179 expensing, and bonus depreciation of $18,000. Let’s assume that your other business driving costs come to 40 cents per mile for a three-month total of $1,200 (3,000 miles x 40 cents).

This would mean you can claim a whopping $19,200 deduction ($18,000 depreciation + $1,200) under the actual expense method, compared to a standard mileage deduction of only $1,635 (3,000 miles x 54.5 cents).

If you’ve been using the standard rate in prior years, you can switch to the actual expense method in 2018. However, you can’t switch to the actual expense method from the standard rate if you’ve previously claimed accelerated depreciation.

Give us a call if you have deduction questions about your vehicle expenses.