Understanding the Mileage Deduction That Can Make a Big Difference on Your Tax Return
Do you know how to calculate the mileage deduction that will make that big break on your tax return? In this blog post, I am going to show you two methods you can use and give you tips on staying audit-proof.
The Standard Mileage Method
We are going to start with the standard mileage method. And basically, it’s simple. The IRS says you take the number of miles you drove during the year and multiply it by 70 cents. So here is what that would look like if you drove 10,000 business miles for the year.
10,000 miles × $0.70 = $7,000 deduction.
Here’s the thing though—a lot of times, there are issues with how many miles are being calculated. After I explain the actual expense method, I’m going to show you how proper mileage calculation, accurate accounting, and audit-proofing are all very important.
The Actual Expense Method
The actual expense method is exactly what it sounds like: it’s the actual expenses that it takes to operate your vehicle for the year. Let me guide you through what those are:
- Gas
- Repairs and maintenance
- Insurance
- Depreciation of the vehicle itself
In this example, we’re going to keep it simple and say that these expenses amount to $10,000. Now, to calculate your deduction, you’ll need to figure out the percentage of your vehicle’s use for business.
How do we do that? Let’s assume your total driving was 10,000 miles. If 5,000 of those miles were for business, you divide business miles by total miles:
5,000 ÷ 10,000 = 50%
Then take 50% of $10,000. Your deduction is $5,000.
Normally, in my experience, the standard mileage method yields a higher deduction. If you’re using the actual expense method and it’s showing lower savings, you might want to seriously evaluate whether that car is really worth keeping.
Common Mileage Tracking Mistakes
Now that we know both methods, let’s talk about where most people go wrong: calculating the miles.
Where are the miles coming from? How are you keeping track of them? And where does the counting start?
Start at Your Headquarters
Headquarters—where is it? Is it at home? Is it off-site? Start there. That’s where the measuring begins.
Don’t Miss Deductible Trips
Another situation, as a licensed CPA, I see quite often is people driving to the bank, to meetings, or to business-related events. These trips are business-related and deductible. Most people miss this, partly because they haven’t kept track or don’t know how to.
Use Mileage Tracking Apps
We have plenty of apps today that can help. I personally use MileIQ for tracking my miles. It’s easy to use, runs in the background on your smart device, and works automatically. How it knows when I’m driving—I don’t know—but it does. It tracks everything, provides reports, and includes date, time, and trip notes.
There are many other apps out there like Everlance, Stride, and a few others others. So, you have lots of options. I can’t speak to those other apps because I don’t use them. I use MileIQ, and it’s the one I recommend to all my clients. There’s even a discount link below you can use if you’re interested in trying it out.
How to Stay Audit-Proof
To stay audit-proof, both methods must be backed up with proof:
- Actual expense method: be sure to keep all receipts.
- Standard mileage method: Use apps to track and document trips.
Here are a few more tips:
- Be sure to keep clear records: date, time, where you went, and what the business purpose was.
- Take a picture of your vehicle’s odometer at the beginning and end of the year.
- If you have oil changes done, keep those records too. I had a client who was audited, and the IRS asked for oil change records to verify mileage. It’s a good starting point.
Final Notes
If you liked this blog post, be sure to check out some of the others where I offer additional tips for saving money on your tax bill each year.