Car & Mileage Tax Calculator

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Car and Mileage: Standard vs Actual Expense Method

As a self-employed worker, freelancer, independent contractor if you drive a car for your 1099 contractor work, you can claim a tax deduction for mileage to help lower your taxes.

What is the tax deduction for mileage?

The IRS allows self-employed taxpayers to deduct the cost of mileage and other car-related expenses from their taxes as a business expense. Moreover, you don't actually need to track miles for taxes in order to claim this write-off since there are two ways to calculate this tax deduction:

  • Standard Mileage Method - You can multiply your business miles driven by the IRS mileage rate of 58.5 cents (current IRS mileage rate).
  • Actual Expenses Method - You can track the actual costs of operating your car. Qualified expenses for this purpose include gasoline, oil, tires, repairs, insurance, tolls, parking, garage fees, registration fees, lease payments, and depreciation licenses.

Who can claim the Car & Mileage tax deduction?

The best part, the deduction is not just limited to Uber, Doordash, or rideshare drivers. If you work primarily from a home office, the occasional supply run, client meeting, or business trip also counts. You don't have to drive year-round, if you happen to drive for work only during the summer, you can write off car expenses during those months.

You can't deduct the cost of commuting as a business expense. The IRS does not consider "commuting miles" as a business expense, so moving to and fro from your home and your workplace does not count. However, running a business errand is considered a valid expense.

Standard Mileage Method

The IRS claims that you can deduct the average costs of operating your vehicle as well as depreciation when arriving at the IRS mileage rate. If you take the standard mileage rate, you cannot deduct the actual expenses of operating your car.

With the standard mileage deduction, you can keep track of how many miles you drive for work. Then, you multiply each mile by a standard amount set by the IRS. Maintaining a record will help you track your business expenses. Car-related expenses are no different. If you plan on writing off your car expenses, you can do that with a mileage log.

IRS Mileage Rate

In 2022, the standard mileage deduction rate increased to 58.5 cents per mile. The following table represents the IRS mileage rate for the years 2022 and 2021-

Category

IRS Mileage Rate 2022

IRS Mileage Rate 2021

Business Mileage Rate

58.5 cents/mile

56 cents/mile

Medical and moving mileage rate

18 cents/mile

16 cents/mile

Charitable Mileage Rate

14 cents/mile

14 cents/mile

The self employed mileage deduction amount depends on how often you use your vehicle. If you're self-employed or work as a contractor, you might be able to deduct the amount of the use of your car for business purposes.

How does mileage tax deduction work?

You can figure out the amount of your deduction simply by multiplying your business mileage by the standard IRS mileage rate of $0.585 (2022) per mile.

Business miles x $0.585(current IRS mileage rate) = Business mileage tax deduction amount

Example: If you're an Uber driver and drive regularly to pick and drop off passengers, then the standard mileage deduction may just work in your favor.

Suppose, you drove 30,000 miles by the end of the year (2021), and 20,000 of those miles were for business. To find your Standard Mileage expenses, you need to multiply the number of miles driven for business (20,000) by the IRS mileage rate 2021, which comes out to $11,200.

Actual Expense Method

With the actual expenses method, you can deduct a percentage of all your car-related expenses. Here, you can track all of your driving expenses yourself which requires you to keep accurate records. Qualified car expenses for this purpose include the following:

  • Gas Oil
  • Tires
  • Insurance
  • Licenses
  • Lease payments
  • Registration fees
  • Repair & Maintenance
  • Garage rent
  • Tolls
  • Car wash
  • Cost of the car

If you own a car, then you can write off your car payments, and if you purchased it a few years ago, then you may even write off a portion of the car's original cost. This is known as depreciation.

To figure out the amount of your deduction under the actual expenses method, you need to find out how much of all the driving you did that year was for work.

Business miles/Total miles = Percentage of deduction

Next, you need to multiply that percentage by your total car expenses.

Total car expenses x Percentage of deduction

Continuing with the same example as above, as a part-time Uber driver, you drove 12,000 miles by the end of the year (2021), and 6,000 of those miles were for business.

Your Actual Expenses included:

  • $1,000 gas
  • $1,500 insurance
  • $7,000 lease payments
  • $600 repairs
  • $100 oil
  • $500 car washes

Your car expenses total up to $10,700. Since the you used the car 50% of times for business, your Actual Expenses deduction is $5,350.

Standard vs Actual Expense Deduction Method

When it comes to deciding the ideal method, most freelancers believe that the standard mileage method will result in a bigger tax break. However, it’s not true. Generally, the actual expenses method tends to be more beneficial than the standard mileage method since it comprises multiple deductions.

If you go for the actual expenses method, you'll have to determine your business-use percentage. To figure this out, you need to estimate how much of your driving mileage is “business-related” as opposed to personal errands and commuting.

The mileage deduction method is a good choice if you drive a lot. Below are some reasons why you may want to select the mileage deduction:

  • You drive a lot for work
  • Your car is old, but gas efficient
  • You drive an electric vehicle

The standard mileage method is mostly beneficial for Uber and Lyft drivers since a majority of their work involve driving.

By using the Actual Expense Method, you can deduct a variety of expenses such as interest on a vehicle loan, vehicle depreciation (leased vehicles cannot be depreciated), registration fees and tax, parking fees and tolls, garage rent, lease payments, insurance, gasoline, oil, maintenance, repairs, tires, and license plates.

When it comes to comparing the two methods, you can write off the following expenses with both methods:

  • Parking
  • Tolls
  • Car washes
  • DMV feess

Pros & Cons of Standard Mileage vs Actual Expenses

Below are a few situations that can help you determine which method will work best for you:

Indications

Standard Method

Actual Expense Method

Your car is expensive to maintain

No

Yes

Your car is efficient and low-maintenance

Yes

No

You're not good at keeping receipts

Yes

No

Your car is new and depreciating fast

No

Yes

You drive a lot for your business

Yes

No

When it comes to the actual expense method, you need to maintain detailed record-keeping of every single expense. However, the standard mileage method makes it simple to track deductions, all you have to do is keep a mileage log of business, personal, and commuting drives.

If you own an expensive vehicle, then you can expect a potentially larger deduction with the actual expense method. Plus, you can score a larger deduction if you don't have a lot of business miles per year.

One of the biggest cons of the actual expense deduction is that you lose the flexibility of hopping between practices if you use this the first year the vehicle is in service.

Limits on changing between methods

If you use the standard mileage method in your first year, then you can choose whether you want to use the actual car expenses or standard mileage in the future. But if you use actual expenses the first year, then you must continue to use actual car expenses for as long as you drive with that vehicle. However, there is an exception- leased cars, whatever method you pick the first year you must stick with it for the duration of the lease period.

Conclusion

The only way to know for sure which method is best for you is to keep careful track of your costs the first year you use your car for business. When you do your taxes, run the numbers to determine if your deduction will be larger using the IRS mileage rate or actual expense method.

If the decision seems too complicated try using FlyFin. It is powered by AI and backed by CPAs. The AI will scan all your car expenses and categorize them as deductions based on your profession. Plus, the CPAs can help you determine which method will work best for you based on your expense and deductions.