Comparing Standard Mileage Deduction vs. Actual Auto Expenses (2024)

Vehicle expenses can be a significant cost for small businesses, especially for contractors and other home service companies who travel to their customers’ homes to meet with and/or perform services on-site.

As such. making the right decisions concerning how to expense the vehicles used in your operation can have a significant impact on your tax savings strategy.

What options are available to you?

Firstly, depending on the structure of your business and/or who owns the vehicle, you may not have a choice as to what options you can choose.

Let’s take a look at the possible scenarios:

Sole Proprietor and Single Member LLC (Filing with a Schedule C)

A sole proprietor or owner of a Single Member LLC who files a Schedule C has the option to choose either Standard Mileage Rate or Actual Expenses.

In this scenario, any employee working for you using their own personal vehicle for business purposes is typically reimbursed using the Standard Mileage Rate. This reimbursement is tax deductible for you and is not taxable to the employee.

Corporations, Partnerships & Multimember LLCs

Corporations have the choice to either use vehicles owned by the entity itself or use vehicles personally owned by employees or a shareholder (including yourself as the owner).

If the corporation itself owns the vehicle, then it must use the Actual Expense method.

If the vehicle is personally owned (whether by a shareholder or an employee of the company), then any business miles driven must be reimbursed using the Standard Mileage Rate.

It’s important to note that even with vehicles owned by a corporation, only miles used specifically for business purposes are deductible. This means that if you drive 15,000 miles total in a year and only 13,500 of those miles are for business use, then only 90% (13,500 ÷ 15,000) of your actual expenses related to the use of that vehicle are deductible

This makes it critical to keep a detailed mileage log in order to determine the appropriate amount to expense for both Standard Mileage Rate and Actual Expenses.

Deciding Between Standard Mileage or Actual Expenses

If you meet one of the requirements mentioned above to where you have a choose which method you can use, you will then need to decide which method will provide you with the greatest tax benefit.

The analysis that is needed to make this decision comes down to simple math.

Standard Mileage Deduction

The standard mileage rate for 2024 is $0.67/business mile. This takes into account most of the costs related to business use of the vehicle like fuel, maintenance & repairs, wear & tear, etc. It also includes depreciation of the vehicle.

Business miles include travel related to the operation of your business such as traveling back and forth from your business location to meet with and/or perform services for customers, picking up materials or equipment, driving to purchase office supplies, etc.

It’s important to note that if you have a brick-and-mortar business location, travel to and from your home to your this location will not be eligible for reimbursement as this is considered commuting rather than business travel.

On top of the mileage deduction itself, you are additionally allowed to deduct interest on the auto loan, vehicle registration fees, property tax fees, and parking & toll fees as long as those costs are business-related.

Important Note: If you think that it may be beneficial to use the Standard Mileage Rate method at any point throughout the use of the vehicle, then it’s required that you use the Standard Mileage method in the first year the vehicle is put into use. After the first year, you will then have the option to switch back and forth as needed.

Actual Expenses

Actual Expenses are pretty straightforward and include items such as the following:

Maintenance and repairs
Gas and oil
Tires
Taxes and registration
Interest on vehicle loans
Licenses
Car Insurance
Rental or lease payments
Parking fees and toll charges
Depreciation

The efficiency of your vehicle and its type of usage will have a great impact on which of these two methods will provide you with the best tax deduction.

For example, suppose you haul heavy equipment that puts considerable wear and tear on your vehicle or you require a vehicle that gets lower than average gas mileage. In that case, actual expenses are more likely to provide a greater tax benefit.

Whereas a vehicle used for a lighter workload and that gets great gas mileage, standard mileage reimbursement will likely produce a more beneficial tax write-off.

Here’s how the math works

Let’s take a look at an example of someone who put 15,000 miles on their vehicle in a given tax year and 13,500 of those miles (90%) were used for business. Let’s also say that throughout the year they accumulate a combined total of $500 in toll & parking fees, auto loan interest, registration fees, and property tax on the vehicle purchase.

Using the Standard Mileage Deduction method, you would have a $9,045 tax deduction (13,500 x 0.67) plus $450 (90% of $500) in additional deductions which brings the total deduction to $9,495.

Let’s say that same person were to use the Actual Expenses method. And for the sake of simplicity let’s say that it is an older vehicle with no depreciation. And their expenses for fuel, maintenance, tires, tolls, parking fees, etc., come to a total of $8,000. Then they would take 90% of $8,000 which will provide a $7,200 tax writeoff.

In the above scenario, this person would have a $2,295 greater tax deduction using the standard mileage rate when compared to the Actual Expenses method.

Conclusion

This article is meant to be a general overview and is by no means an exhaustive list of all things to be considered.

As always, we advise that you consult with a tax professional who is familiar with your industry before making any such decision.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. We assume upon the information contained herein.