When it comes to deducting business expenses related to the use of a car, the IRS offers two different approaches: the standard mileage rate and the actual expense method. What are the rules in terms of changing from one to another or back? Is it possible?
The standard mileage rate
The standard mileage rate allows taxpayers to deduct a set amount per mile driven for business purposes. The federal mileage rate for the second half of 2022 is 62.5 cents per mile driven for business purposes. This approach is often simpler than the actual expense method, as it does not require taxpayers to keep track of their expenses except for tolls and parking fees, which they’re still able to deduct using the standard mileage rate.
The actual expense method
The actual expense method, on the other hand, allows taxpayers to deduct the actual costs incurred related to the business use of their car. This includes expenses such as gas, oil, repairs, and depreciation. While this approach may result in a higher deduction – especially in the case of expensive cars or a high number of miles -, it also requires taxpayers to keep meticulous records of their expenses.
So which approach is better?
It depends on your individual situation. The standard mileage method is often simpler and requires less record-keeping. However, if you drive a lot for business purposes or have a car with high maintenance costs, you may be able to get a bigger deduction by using the actual expense method.
Are there any situations when I can’t use the standard mileage rate?
There are some situations when you cannot use the standard mileage rate. For example, if you have 5 or more cars at the same time (as in fleet operations), you must use the actual expense method to deduct your business expenses.
Can I switch from actual expenses to standard mileage rate?
Finally, you can switch from the standard mileage rate to actual expenses if you use that method in the first year of using a car. However, once you choose the actual expense method in the first year of using a particular car, you must continue using that same method for as long as you use that car for business.