The IRS allows freelancers, gig workers like Uber or Lyft rideshare drivers, and the self-employed to deduct their business mileage in one of two ways.
One is the actual expenses method, which yields more deductions for small businesses using fuel-efficient cars. It is also easier to track than the standard mileage rate.
Actual Expenses
There are two ways to calculate IRS miles deduction: the standard mileage rate method and the actual expense method. Each has pros and cons, so knowing which will work best for you is essential.
The standard mileage method allows you to multiply your business miles driven by the IRS standard mileage rate, which changes annually. This approach is a simple way to track your vehicle’s expenses and reduce your taxable income.
However, it is essential to note that the standard mileage rate only applies to vehicles you drive for business purposes. This includes small business owners, self-employed individuals, and independent contractors operating company cars.
For example, if you’re an Uber driver or a Doordash operator, using the standard mileage rate will allow you to deduct the total cost of your car’s business use, including gas, oil, repairs, tires, insurance, registration fees, licenses and depreciation (or lease payments) attributable to the portion of your vehicle’s overall miles driven that are for business.
On the other hand, the actual expenses method is more complex and requires you to track your business-related expenses separately. This means that you will need to make sure that you keep detailed records of your driving costs, such as gas, oil, repairs, insurance, car washes, and depreciation.
Standard Mileage Rate
Using a mileage calculator, the standard mileage rate is a simple way to calculate the IRS Miles Deduction. It requires less recordkeeping and is based on the number of miles driven rather than the actual expenses.
The IRS sets the standard mileage rate for business use based on an annual study of operating an automobile’s fixed and variable costs. It also sets rates for medical, moving, and charitable purposes.
In 2020, the rate was 57.5 cents per mile for business cars, 17 cents for medical, and 14 cents for charitable. It included 27 cents for the cost of depreciation.
It was one of the most significant increases in the rate in a decade. The IRS typically updates the rates once a year.
This year’s increase was 3 cents a mile. The federal agency announced it in June.
High gas prices and other cost trends were significant reasons for the change. The gas price is one of the main factors determining the cost of driving a car for business.
It is essential to keep track of your vehicle’s miles when using the standard mileage rate. This can be done in various ways, such as using a mileage tracking app or keeping a written log in your vehicle.
The standard mileage rate is an excellent way to simplify your tax filings if you are self-employed. It is also a suitable method for employees whom their employers reimburse for business trips in their vehicles.
Depreciation
The IRS allows employees and self-employed individuals to use the standard mileage rate for a deduction on their tax returns. This rate covers the expenses for business travel, including gas, insurance, repairs, maintenance, and depreciation.
However, there is another way to calculate the deduction using actual car expenses incurred throughout the year. The accurate expense method requires a driver to keep track of all their vehicle expenses, such as oil, gas, tires, and lease payments. The employee then multiplies these expenses by their percentage of miles driven for business purposes to find their deduction.
If the driver uses a modern mileage tracker app to record their miles, they can easily calculate their deduction with this method. This can be especially helpful if they have an expensive car or they have to travel a lot for their job.
The actual expense method can also be used if you purchase or lease a vehicle for your business. For this reason, tracking your costs the first year you use a car for business is essential.
If you’re planning to switch to the actual expenses method from the standard mileage rate, you need to keep good records of all your expenses the first year you use a vehicle for your business. This can help determine whether you will benefit more by switching to the actual expense method or claiming the standard mileage rate.
Commuting
Whether you’re an employee or self-employed, you may have wondered whether your commute to and from work can be deducted as a business expense. The IRS has a few rules that can make this difficult, but it is possible to get around these restrictions with careful planning.
The IRS defines commuting as traveling from home to your central or regular job location. This can include driving to the office from home or taking a bus or train to your workplace.
While commuting can be a major inconvenience, it also provides valuable time to focus on your professional and personal goals. During a long drive, you can plan your day and make it more productive by scheduling meetings, preparing for interviews, or working on significant projects.
Also, consider carpooling to reduce your mileage, and you can use an app to keep track of how many miles you drive. This tool will help you track your driving habits and determine which routes are more fuel efficient.
However, you can only deduct your commuting trips related to your business at your primary job location. For example, if you’re on an offshore oil rig, the first and last rides to and from your office would not be deductible as business miles.
