There are two ways to calculate your mileage deduction: The standard mileage rate, and the actual expense method. We’ll compare the two, so you can choose which is right for your business.
IRS mileage rates for 2022 and 2023
On June 9, the IRS announced an increase in the standard mileage rate for the second half of 2022. In recognizing rising gas prices, the standard mileage rate was increased by 4 cents (except for charitable service mileage rates).
*As per the Internal Revenue Service mileage rate guidelines, only qualified active-duty members of the Armed Forces are eligible to deduct medical and moving expenses mileage (moves must be related to a permanent change of station).
Who qualifies for the business mileage rate?
Prior to 2017, any taxpayers could write off mileage expenses they incurred for business purposes as itemized deductions on their tax returns. With the passage of the Tax Cuts and Jobs Act, now only self-employed people can write off business miles.
So, if your moving business is an limited liability company (LLC) with two panel trucks, you can write off the cost of mileage for both work vehicles on your tax return.
And if your Etsy store is a sole proprietorship and you’re the only employee, you can write off the mileage incurred when you drive to the post office to mail packages.
Keep in mind, the miles you drive between your home and regular place of work don’t count as business mileage.
Mileage can either be written off in part or in whole. If you have a dedicated vehicle that you only use for work purposes, you can write off 100% of your mileage on your tax return. If you have a personal vehicle that you sometimes use for your business, you can write off only the miles driven while you work.
The standard mileage rate for service of charitable organizations
Outside of running your business, if you drive your vehicle while volunteering for a charitable organization, the IRS gives you a break. So long as vehicle expenses are not reimbursed by the organization, you can claim a deduction of 14 cents per mile driven.
How to calculate a mileage deduction
There are two ways you can write off mileage:
1. The standard mileage rate
The standard mileage rate writes off a certain amount for every mile you drive for business purposes. So, for the 2023 tax year, you are able to write off $0.655 for every mile you drive (up from $0.585 for January 1 to June 30 and $0.625 for July 1 to December 31 in 2022).
Every vehicle-related expense you incur is rolled into that deduction—so you can’t use the standard mileage rate deduction, and then also deduct the cost of gasoline, insurance, or maintenance.
2. The actual expense method
The actual expense method requires you to record every expense related to your vehicle and report the total on your tax return. This includes expenses like gasoline, insurance, car lease payments, depreciation, new tires, parking, and tolls.
If 100% of your use of a car is for business purposes, you can deduct 100% of your expenses. If you only partly use your car for business purposes, you can deduct a percentage.
So, if 15% of the miles you drive in 2023 were for work, you can deduct 15% of your total vehicle-related expenses per year on your tax return.
Unlike the standard mileage rate, the actual expense method takes some number-crunching in order to figure out how much you can deduct.
An example using the actual expense method
Say you drove 10,000 miles total in your pickup truck last year, and 2,000 of those miles count as business use of a car. In total, you spent $1,200 on vehicle-related expenses.
(2,000 miles / 10,000 miles) x $1,200 = $240
When we divide 2,000 by 10,000, we get 0.2 (or 20%). Multiplying that by $1,200 gets us 20% of the money you spent on your car last year—or $240. So you can deduct $240 on your tax return for business mileage.
Choosing the standard mileage rate or actual expense method
Whether you opt to deduct the standard mileage rate or use the actual expense method depends one which approach saves you more money. Your best bet is to spend one month tracking your vehicle expenses, as well as business mileage on your vehicle. Then do the calculations to find out what you can deduct using each method.
Is car use a variable or actual cost?
Whether you track business mileage as a variable cost or an actual cost will depend on how you use the vehicle for business travel.
Quick refresher: Variable costs increase or decrease according to how much business you’re doing. Actual costs (also called actual expenses or fixed costs) stay the same regardless of how much business you do.
If you drive around all day in your panel truck dropping off orders, your business expenses for that vehicle will increase the more deliveries you make—and the more income you earn. In that case, it’s a variable cost.
If you have to visit the same job sites on a regular basis to do scheduled maintenance on your customers’ photocopy machines, you would record your mileage as an actual cost. In this case, your mileage won’t increase or decrease according to your income—you’re paid a flat rate for doing maintenance.
Keep in mind, this actual cost is still variable in practice—it will fluctuate according to gas prices. But since it isn’t tied to your income, it’s still considered a fixed cost.
How to deduct business mileage on your taxes
The method and forms you use to deduct mileage expenses on your taxes depends on your business structure.
Sole proprietorships and LLCs
Sole proprietorships and single-member LLCs report their mileage deduction on Form 1040, Schedule C, as a miscellaneous itemized deduction.
The process is slightly more complicated than it is for sole props and LLCs. For corporations, you must take into account employee use of a car.
If the employee owns the vehicle
Until the TCJA, employees had two choices.
- They could claim reimbursement for vehicle costs from the corporation, either by reporting the actual costs, or by collecting a Fixed and Variable Rate Allowance (FAVR). Whether they claimed actual expenses, or got quarterly FAVR payment from their employer, they could deduct it on their tax return.
- They could choose not to get reimbursed, in which case they’d write the unreimbursed expenses off their taxes.
Starting in the 2018 tax year, employees can no longer write off unreimbursed vehicle expenses.
If the corporation owns the vehicle
The corporation can write off the vehicle expenses using the actual expense method only. Write offs are limited to business use —so if the employee uses it for purposes other than business travel, that percentage of use can’t be written off.
One exception is if the corporation treats the personal use percentage as part of an employee’s salary. In that case, 100% of the vehicle’s business expenses can be written off.
Partnerships report their mileage deduction on Form 1065.
The rules for partnerships deducting business use of a vehicle are the same as they are for S corporations. One difference: If a partner has unreimbursed use of a business vehicle as part of the conditions of their partnership agreement, they can claim it as an unreimbursed partnership expense on Schedule E of their Form 1040.
LLCs may opt to file as S corporations or partnerships, in which case they should use the forms required for those respective business structures.
How Bench can help you stay on top of your deductions
As a small business owner, it can be difficult to stay on top of your deductibles throughout the year. It’s even harder to try and piece things together at year end.
Remember that lunch you bought a client last January? Sure, you remember the name of the restaurant, but where is that receipt? Without tracking in place, many small business owners miss out on claiming tax write offs.
That’s where bookkeeping comes in.
In order to claim your deductions, you need to keep accurate categorized records of your transactions by staying on top of your monthly bookkeeping. With properly categorized expenses, it’s a lot easier to tally up your deductions at year end.
If you would rather spend your time on other aspects of your business than bookkeeping, check out Bench. We do small business bookkkeeping so you don’t have to.
When Bench does your bookkeeping, we catch your deductions every month so you have confidence your tax bill will be as low as possible.
If optimizing your taxes is something you’d like an expert’s opinion on, Bench also offers unlimited tax advisory as part of our small business tax support.
We’re here to take your financial admin off your plate so you can focus on what you do best to grow your business. Try us free.