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Car and Mileage: Standard vs Actual Expense Method

If you drive your car for your 1099 contractor work as a self-employed worker, freelancer or independent contractor, you may be qualified to claim a driving tax deduction for mileage to help lower your taxes.

Tax deduction for mileage is important for a large population of delivery drivers that use a car, bike, delivery van, semi truck, etc. to deliver various goods as part of their job. Moreover, platforms like Postmates, Uber and Lyft have made it easy for drivers to find delivery and rideshare jobs in their geographical location.

When you are working as a delivery driver, a mileage tax deduction can help you save a lot of money in terms of taxes owed to the IRS. For the 2022 tax season, the IRS has also slightly increased the standard mileage rate.

Key takeaways:

  • The actual expense method gives you a larger deduction if you work as a full-time delivery driver.
  • The IRS has set the latest standard mileage rate at 58.2 cents per business mile.

What is mileage tax deduction?

There’s a large population of freelance delivery drivers in the USA, and driving is the most important part of their business. Freelance delivery drivers also fall into the self-employed worker bracket because they have the freedom to choose the gigs they want and are not bound to one company’s payroll.

Therefore, The IRS allows self-employed taxpayers to deduct the cost of mileage and other car-related expenses from their taxes as a business expense. Since there are two ways to calculate the mileage tax deduction, you don't actually need to use a mile tracker for taxes to claim this write-off.

  • 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.

Quick tip

Choosing the actual deduction method usually results in a larger deduction from your taxable income

Who can claim the Car & Mileage tax deduction?

Fortunately, the driver tax deduction is not 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. The IRS considers your business driving mileage to be deductible from your taxable income. You don't have to drive year-round, either. If you happen to drive for office 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 for driving tax deduction

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: Say you're a full-time Uber driver, and you drive 45,000 miles by the end of the year. If 25,000 of them were for business, and you apply the standard mileage rate to them, they need to multiply the number of miles driven for business (25,000) by the IRS mileage rate 2021, which comes out to $14,625.

Actual expense method for driving tax deduction

The actual expenses method is slightly more advanced, as it helps you deduct a percentage of all your car-related expenses. Here, the challenge for you is to track all of your driving expenses yourself, and it requires you to keep accurate records. Qualified car expenses for this purpose include the following:

  • ⛽️ Gasoline
  • 🛢 Oil
  • ⚫️ Tires
  • 📝 Insurance
  • 💳 Licenses
  • 🗂 Lease payments
  • 💵 Registration fees
  • ⚒ Repair & Maintenance
  • 🏘 Garage rent
  • 🎫 Tolls
  • 🚰 Car wash
  • 🚘 Cost of the car

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. It’s because the IRS allows you to deduct the depreciation cost of your car from your taxable income. However, the depreciation must have happened while you were using the car for business purposes.

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.To calculate, first take your business miles and divide them by your total miles to arrive at the percentage of deduction. Next, you need to multiply that percentage by your total car expenses. Then, take total car expenses multiplied by 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:

  • $2,000 gas
  • $1,500 insurance
  • $7,000 lease payments
  • $850 repairs
  • $120 oil
  • $600 car washes

Your car expenses total up to $12,070. Since the you used the car 50% of times for business, your Actual Expenses deduction is $6,035.

Finding all your qualifying expenses manually is a challenge, but FlyFinautomatically finds all your deductions in minutes. The app securely connects with your bank statements and categorizes your expenses as deductions, possible deductions or non-deductions.

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. Both have their pros and cons, and you need to figure out which one of the two methods gets you a bigger deduction from your taxable income.

Generally, the actual expenses method tends to be more beneficial than the standard mileage method since it comprises multiple deductions. There’s just one catch. If you go for the actual expenses method, you'll have to determine the business-use percentage of your car on your own, unless you use a tool like FlyFin.

To figure the work mileage, you need to estimate how much of your driving mileage is business-related as opposed to how much is used for personal errands and commuting.

The mileage deduction method is a good choice if you drive a lot.

The standard mileage method is mostly beneficial for Uber and Lyft drivers since a majority of their work involves driving. But Uber and Lyft drivers cannot deduct other car-related expenses using the standard mileage deduction.

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.

For example, if your work car has a major maintenance need like a differential repair or replacement, you can add that expense to your tax deductions.

In both methods, you can write off the following expenses:

  • 🎟 Parking
  • 🎫 Tolls
  • 🚿 Car washes
  • 💸 DMV feess

Pros and Cons of Standard Mileage Deduction and Actual Expenses Method

With the Actual Expenses method, you need to maintain detailed record keeping for every single expense. 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 for a tax year. You can simply take a picture of your odometer at the start of the year to have a better idea of the total mileage.

If you own an expensive vehicle, you can expect a potentially larger deduction with the Actual Expenses 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.

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

Limits on changing between methods

If you use the standard mileage method in your first year, you can choose whether to use the actual car expenses or standard mileage in the future. But if you use actual expenses the first year, you must continue to use actual car expenses for as long as you use that vehicle for work.

For example, if you bought a brand new Ford Transit for your freelance delivery work, and you choose to go for the actual expense method the first year you use the car, you can’t switch back to the standard deduction method the next year.

So it may be better to choose the standard expense deduction method in the first year and then compare your actual expenses with that amount. If you think your actual expenses will be more in future, you can choose it in the next year’s filing. If you are not sure whether your actual expenses will be more or less than the standard deduction, you can reach out to FlyFin CPAs for an answer from an expert.

There is an exception: with leased cars, you have to use whatever method you choose the first year for the duration of the lease period.

Conclusion

The only way to ensure that you always choose the deduction method with a bigger value is to maintain a record of your costs the first year you use your car for business. When you do your taxes, add all the expenses to determine whether 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 A.I. 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 expenses and deductions.

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