How to Decide Which Mileage Tax Deduction is Best
Get the appropriate tax forms., Gather receipts or payment statements throughout the year., Keep a record of deductible mileage., Compute the annual depreciation of your car., Calculate your auto expense per mile., Determine your actual mileage tax...
Step-by-Step Guide
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Step 1: Get the appropriate tax forms.
You can find all the tax forms that you will need on the Forms and Publications page of the official IRS website.
This is located at https://www.irs.gov/forms-pubs.
On that site, you can search for any form or publication by name or number.
You may also get forms and publications by calling the IRS at 800-829-1040.
An overall informational guide you may wish to review is Publication 17, the “Tax Guide for Individuals.” For calculating business related expenses as an employee, you need Form
2106.
This provided the basis for most of the calculations in this article.
If you are self-employed and are claiming tax deductions based on the business use of your vehicle, you will need Schedule C. -
Step 2: Gather receipts or payment statements throughout the year.
In order to calculate your actual expense deduction for the year, you will need to add up the expenses.
You should have receipts for oil changes, car repairs, new tires, fuel purchases, and all other costs related to the vehicle that you use for your business.Do not include tolls or parking in this amount.
These business costs are deducted separately. , Over the course of the year, track and record your total mileage and the mileage that you traveled for business purposes.
Do not include mileage traveling between home and work as business mileage.
You will need both the total mileage and the business mileage in order to make the necessary calculations.For example, suppose that on Jan. 1 you bought a new car that you use for both personal and business purposes.
Therefore, at the start of the year, the odometer reading is at
0.
At the end of the year, the odometer is at, for this example, 25,000.
Out of that 25,000, you recorded that 10,000 was used for business.
Therefore, your total mileage is 25,000, and your business mileage is 10,000.
You will use these figures to calculate your deduction. , To figure the annual depreciation, you begin by determining the percentage of vehicle use that was for business.
Divide the business miles by the total miles driven to determine the percentage that is business use.If this result is greater than
0.5 (50% business use), use the chart and limitations in the instructions for Form 2106 or, if applicable, Form
4562.
If the business use of the car is 50 percent or less, you must use the straight-line method is used instead of an acceleration method.
The straight-line method divides the purchase price by 5 years to get the annual depreciation.
As an example, if the car’s total mileage for the year was 25,000 miles, and 10,000 was for business, then the percentage of business use is 10,000/25,000, which is
0.4, or 40%.
In this example, you would use the straight-line depreciation. , Add together auto-related business expenses and the annual depreciation.
Then divide this total by the total mileage traveled during the tax year.
This results in your actual auto expense per mile.For example, assume your auto-related expenses total $3,475 for the year, and your straight-line depreciation is $4,000.
Then your total expenses will be $7,475.
If you drove 25,000 miles in that year, then your expense per mile will be $7,475 / 25,000, which is
0.299, or almost 30 cents per mile. , Multiply the number of miles traveled for business by the per-mile actual auto expense to get your actual mileage tax deduction.
Alternately, multiply the total auto expense by the business use percentage calculated in Step 3 to arrive at approximately the same amount.Continuing with the example from the previous step, if your rate per mile is
0.299, and you drove 10,000 miles for business purposes, then multiply 10,000 x .299 for a total deduction of $299. , If you wish to use the standard tax deduction rate, or even if you think you may wish to use the standard rate for some year in the future, you must make the standard rate your choice for the first year that you deduct mileage expenses.
In all subsequent years, you may switch and choose either the standard rate or the actual expenses., Refer back to your records of the total number of miles that you traveled for business purposes in the tax year.
Multiply that actual mileage traveled for business purposes by the standard mileage rate to determine the standard deduction amount.
For 2015, the rate was
57.5 cents per mile, but it changes from year to year.Therefore, as an example, if you traveled 1,000 miles during the year for deductible business purposes, you would multiply 1000 x
0.575.
The result would be a tax deduction of $575. , You must select this option by the date that your tax return is due, including the filing of any extensions.
If you do not opt for the standard rate by that deadline, you will lose the opportunity., The standard deduction for auto mileage is not available to you in the following circumstances.
In these circumstances, you must report the actual expenses and choose the deduction accordingly:
If you use five or more cars at the same time (as in fleet operations) If you claimed a depreciation deduction for the car using any method other than straight line depreciation If you claimed a section 179 deduction on the car (this is related to claiming the car’s cost as a capital expense for your business) If you claimed the special depreciation allowance on the car If you claimed actual car expenses after 1997 for a car you leased If you are a rural mail carrier who received a qualified reimbursement. , After you calculate the actual expense deduction and the standard deduction, compare the two values.
In most cases, you will want to make the selection that results in a higher deduction value.
For example, if you drove your car 1,000 miles for business, your standard deduction would be $575.
If you calculated actual expenses that resulted in a deduction of $625, you would probably elect the actual deductions. , If you believe, for example, that this year had higher than usual expenses for automobile use, you may think that the year’s expenses are an anomaly.
If you think that in future years the standard expenses would be better for you, then you should choose the standard expenses, if this is your first year of claiming expenses for the vehicle, in order to keep your options open for future years., You may find all the forms you need on the Forms and Publications page at the IRS website, www.irs.gov.
If you are self-employed, you will complete Schedule C to report business related tax deductions.
If you are an employee and you are claiming a mileage related tax deduction, you will need to complete Form
2106.
You will then transfer some of the data from Form 2106 to Schedule A, where you itemize your deductions. -
Step 3: Keep a record of deductible mileage.
-
Step 4: Compute the annual depreciation of your car.
-
Step 5: Calculate your auto expense per mile.
-
Step 6: Determine your actual mileage tax deduction.
-
Step 7: Make the standard tax deduction choice in the first year that you are eligible.
-
Step 8: Calculate your standard tax deduction for mileage.
-
Step 9: Make your choice for the standard tax deduction rate by the due date of your tax return.
-
Step 10: Understand when you cannot choose the standard deduction.
-
Step 11: Make the selection that results in the higher deduction.
-
Step 12: Consider future uses and the possibility of making the standard deduction.
-
Step 13: Report your mileage expense on the proper tax form.
Detailed Guide
You can find all the tax forms that you will need on the Forms and Publications page of the official IRS website.
This is located at https://www.irs.gov/forms-pubs.
On that site, you can search for any form or publication by name or number.
You may also get forms and publications by calling the IRS at 800-829-1040.
An overall informational guide you may wish to review is Publication 17, the “Tax Guide for Individuals.” For calculating business related expenses as an employee, you need Form
2106.
This provided the basis for most of the calculations in this article.
If you are self-employed and are claiming tax deductions based on the business use of your vehicle, you will need Schedule C.
In order to calculate your actual expense deduction for the year, you will need to add up the expenses.
You should have receipts for oil changes, car repairs, new tires, fuel purchases, and all other costs related to the vehicle that you use for your business.Do not include tolls or parking in this amount.
These business costs are deducted separately. , Over the course of the year, track and record your total mileage and the mileage that you traveled for business purposes.
Do not include mileage traveling between home and work as business mileage.
You will need both the total mileage and the business mileage in order to make the necessary calculations.For example, suppose that on Jan. 1 you bought a new car that you use for both personal and business purposes.
Therefore, at the start of the year, the odometer reading is at
0.
At the end of the year, the odometer is at, for this example, 25,000.
Out of that 25,000, you recorded that 10,000 was used for business.
Therefore, your total mileage is 25,000, and your business mileage is 10,000.
You will use these figures to calculate your deduction. , To figure the annual depreciation, you begin by determining the percentage of vehicle use that was for business.
Divide the business miles by the total miles driven to determine the percentage that is business use.If this result is greater than
0.5 (50% business use), use the chart and limitations in the instructions for Form 2106 or, if applicable, Form
4562.
If the business use of the car is 50 percent or less, you must use the straight-line method is used instead of an acceleration method.
The straight-line method divides the purchase price by 5 years to get the annual depreciation.
As an example, if the car’s total mileage for the year was 25,000 miles, and 10,000 was for business, then the percentage of business use is 10,000/25,000, which is
0.4, or 40%.
In this example, you would use the straight-line depreciation. , Add together auto-related business expenses and the annual depreciation.
Then divide this total by the total mileage traveled during the tax year.
This results in your actual auto expense per mile.For example, assume your auto-related expenses total $3,475 for the year, and your straight-line depreciation is $4,000.
Then your total expenses will be $7,475.
If you drove 25,000 miles in that year, then your expense per mile will be $7,475 / 25,000, which is
0.299, or almost 30 cents per mile. , Multiply the number of miles traveled for business by the per-mile actual auto expense to get your actual mileage tax deduction.
Alternately, multiply the total auto expense by the business use percentage calculated in Step 3 to arrive at approximately the same amount.Continuing with the example from the previous step, if your rate per mile is
0.299, and you drove 10,000 miles for business purposes, then multiply 10,000 x .299 for a total deduction of $299. , If you wish to use the standard tax deduction rate, or even if you think you may wish to use the standard rate for some year in the future, you must make the standard rate your choice for the first year that you deduct mileage expenses.
In all subsequent years, you may switch and choose either the standard rate or the actual expenses., Refer back to your records of the total number of miles that you traveled for business purposes in the tax year.
Multiply that actual mileage traveled for business purposes by the standard mileage rate to determine the standard deduction amount.
For 2015, the rate was
57.5 cents per mile, but it changes from year to year.Therefore, as an example, if you traveled 1,000 miles during the year for deductible business purposes, you would multiply 1000 x
0.575.
The result would be a tax deduction of $575. , You must select this option by the date that your tax return is due, including the filing of any extensions.
If you do not opt for the standard rate by that deadline, you will lose the opportunity., The standard deduction for auto mileage is not available to you in the following circumstances.
In these circumstances, you must report the actual expenses and choose the deduction accordingly:
If you use five or more cars at the same time (as in fleet operations) If you claimed a depreciation deduction for the car using any method other than straight line depreciation If you claimed a section 179 deduction on the car (this is related to claiming the car’s cost as a capital expense for your business) If you claimed the special depreciation allowance on the car If you claimed actual car expenses after 1997 for a car you leased If you are a rural mail carrier who received a qualified reimbursement. , After you calculate the actual expense deduction and the standard deduction, compare the two values.
In most cases, you will want to make the selection that results in a higher deduction value.
For example, if you drove your car 1,000 miles for business, your standard deduction would be $575.
If you calculated actual expenses that resulted in a deduction of $625, you would probably elect the actual deductions. , If you believe, for example, that this year had higher than usual expenses for automobile use, you may think that the year’s expenses are an anomaly.
If you think that in future years the standard expenses would be better for you, then you should choose the standard expenses, if this is your first year of claiming expenses for the vehicle, in order to keep your options open for future years., You may find all the forms you need on the Forms and Publications page at the IRS website, www.irs.gov.
If you are self-employed, you will complete Schedule C to report business related tax deductions.
If you are an employee and you are claiming a mileage related tax deduction, you will need to complete Form
2106.
You will then transfer some of the data from Form 2106 to Schedule A, where you itemize your deductions.
About the Author
John Edwards
Specializes in breaking down complex pet care topics into simple steps.
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