As a self-employed small business owner, every penny counts. One of the easiest ways to save money and reduce your tax burden is by taking advantage of the mileage tax deduction. This often-overlooked tax benefit can provide significant savings, especially for businesses that require frequent driving. Whether you’re running errands for your business, meeting clients, or delivering products, tracking your mileage can pay off when tax season rolls around. In this post, we’ll break down what the mileage deduction is, how it works, and how you can make the most of it.
What is the Mileage Tax Deduction?
The mileage tax deduction is a tax break provided to self-employed individuals and small business owners who use their vehicles for business purposes. This deduction allows you to reduce your taxable income by deducting the costs of operating a vehicle for business use.
There are two methods for claiming the mileage deduction:
Standard Mileage Rate: This method allows you to deduct a set amount per mile driven for business purposes. The IRS sets this rate annually. For 2024, the standard mileage rate is 65.5 cents per mile.
Actual Expense Method: This method allows you to deduct the actual costs associated with operating your vehicle for business use, such as gas, maintenance, insurance, and depreciation.
Both methods have their pros and cons, and choosing the right one can depend on your specific situation.
Who Can Claim the Mileage Deduction?
The mileage deduction is available to anyone who uses their vehicle for business purposes, including:
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Self-employed individuals (freelancers, gig workers, and independent contractors)
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Small business owners (S-corporations, LLCs, and sole proprietors)
However, it’s important to note that if you are an employee and drive for your job, you typically cannot claim this deduction unless you’re self-employed or running a side business. This is because the Tax Cuts and Jobs Act of 2017 eliminated the unreimbursed employee expenses deduction for most employees.
Standard Mileage Rate vs. Actual Expenses: Which Should You Choose?
When it comes to claiming your mileage deduction, you have two options: the standard mileage rate or the actual expenses method. Understanding the difference between the two can help you determine which method will result in the largest deduction.
Standard Mileage Rate Method
The standard mileage rate is simple and straightforward. You track your business miles driven throughout the year and multiply that number by the IRS mileage rate for that year. This method covers all vehicle-related expenses, including gas, maintenance, insurance, and depreciation.
For example, if you drove 10,000 miles for business in 2024, your deduction would be:
10,000 miles x 65.5 cents per mile = $6,550 deduction
Pros:
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Easy to calculate and track
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Covers all vehicle-related expenses
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No need to keep receipts for individual expenses
Cons:
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If you have high vehicle expenses, this method may not give you the largest deduction
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Not available if you’ve previously claimed actual expenses for the same vehicle
Actual Expenses Method
The actual expenses method allows you to deduct the actual costs of operating your vehicle for business use. This includes expenses such as gas, oil changes, tires, repairs, insurance, registration fees, and depreciation.
To claim this deduction, you need to calculate the total costs of operating your vehicle for the year and then determine the percentage of business use. For example, if you spent $8,000 on vehicle-related expenses and 75% of your driving was for business, you could deduct $6,000 ($8,000 x 75%).
Pros:
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Can result in a larger deduction if you have high vehicle expenses
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Flexibility to deduct specific costs like repairs or high insurance premiums
Cons:
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Requires more record-keeping and documentation
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You need to keep receipts for all vehicle-related expenses
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More time-consuming to calculate
What Counts as Business Mileage?
To claim the mileage deduction, you need to ensure that the miles you’re claiming are for legitimate business purposes. Here are some examples of qualifying business mileage:
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Traveling to meet clients or customers
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Driving to business-related meetings, networking events, or conferences
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Making deliveries or picking up supplies for your business
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Traveling between different job sites (for contractors, freelancers, etc.)
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Errands related to your business, such as going to the bank, post office, or office supply store
Keep in mind that commuting from your home to your primary place of business does not count as business mileage. However, if your home is your primary place of business, travel from your home to a client or secondary work location is deductible.
Tips for Maximizing Your Mileage Deduction
Keep Detailed Records: The IRS requires you to keep detailed records of your business mileage, including the date, purpose of the trip, starting and ending odometer readings, and total miles driven. You can use a mileage log, spreadsheet, or one of the many apps available to track your mileage. Some popular apps include MileIQ, Everlance, and Stride.
Track Business vs. Personal Use: If you use your vehicle for both business and personal purposes, you’ll need to track the percentage of business use. For example, if 60% of your total miles driven during the year were for business, you can deduct 60% of your actual expenses (if you use the actual expenses method).
Don’t Forget About Other Vehicle-Related Deductions: In addition to the mileage deduction, don’t forget about other potential deductions such as tolls, parking fees, and business-related car rental expenses.
Review IRS Guidelines Annually: The IRS updates the standard mileage rate every year, so it’s important to stay informed of the current rate. For 2024, the rate is 65.5 cents per mile, but this can change from year to year.
Consult with a Tax Professional: If you’re unsure about which method to choose or how to properly track your mileage, consulting with a tax professional is always a good idea. They can help you determine which method will save you the most money and ensure that you’re complying with IRS regulations.
Common Mistakes to Avoid
Not Tracking Mileage: One of the biggest mistakes small business owners make is failing to track their business mileage accurately. Without proper documentation, the IRS may disallow your deduction, resulting in lost savings.
Overestimating Business Use: Be honest and accurate when calculating the percentage of business use for your vehicle. Overestimating business mileage can raise red flags with the IRS and lead to an audit.
Failing to Keep Receipts: If you’re using the actual expenses method, make sure to keep all receipts and records for vehicle-related expenses. Without them, you may not be able to claim the full deduction.
Conclusion: Mileage Deduction = Big Savings
The mileage tax deduction is a valuable tool for self-employed individuals and small business owners looking to reduce their tax liabilities. Whether you choose the standard mileage rate or the actual expenses method, taking the time to track your business mileage accurately can result in substantial tax savings.
At North Bay Tax Co., we specialize in helping small business owners throughout the North Bay, and beyond navigate the complexities of tax deductions, including the mileage deduction. If you’re unsure about how to maximize your mileage deduction or have other tax-related questions, contact us today! We’ll help you keep more of your hard-earned money in your pocket.
For more information visit the Internal Revenue Service website at IRS.gov