Tax Tips: Standard Mileage or Actual Vehicle Expenses?

People who use their personal vehicles for business or vehicles dedicated to business can deduct mileage for business travel. This can be done in by using one of two methods that the IRS makes available: the standard mileage deduction or the deduction for actual incurred vehicle expenses. Which one is better? Let's take a look at each option.

If you use a car, truck, van, or other vehicle to conduct your business, you're entitled to a deduction for the business miles that you drive. Since the government is strict on mileage for business as opposed to personal-use vehicles that may do double duty, you'll want to keep good records of gas receipts and odometer readings. Business mileage is restricted to travel between the business office and other places of business, or to residences for business reasons. For example, you can drive to the post office from the business office to mail packages to clients. Or, the business vehicle can travel from a warehouse where products are stored to a customer's home for delivery.

Vehicles that are used for both business and personal use must only use the business miles driven for tax deduction purposes. If the car is used for business sixty percent of the time, then sixty percent of the mileage cost can be claimed on a tax return. Keeping a mileage log in the car can eliminate any confusion when it comes to determining the mileage deduction.

The current standard mileage rate for tax filing year 2007 and beyond (unless changed at a later date) is 48.5 cents per mile. Of the two deduction methods, you can only use one of them in any given tax year. The most reliable way to determine which option will give you the larger deduction is to compute both and compare the two figures. For the actual expenses method, lease payments, depreciation, maintenance, repairs, insurance, and registration fees can all be included in the calculation. A business that owns more than one vehicle (such as a limousine service or moving company) would normally calculate actual vehicle expenses, because the standard mileage option is not allowed when a business has five or more vehicles in service at the same time. (If less than that number of vehicles is in use, the standard mileage deduction can be employed.)

The standard mileage rate must be utilized the first year that you put a vehicle in service for your business. After the first year, however, you can choose either option. But the standard mileage rate does have limitations. It can't be used if the subject vehicle is a taxi, or is used as a mail-carrying vehicle, or if you've claimed any other depreciation or deduction for the vehicle. Further, cars leased before the end of 1997 must use the standard mileage rate for the entire period of the lease.

Compute the two values in order to determine what's best for you. Whatever decision you make for any given year is locked in, but you can switch between the two methods in subsequent years that the vehicle is in service for your business. Although standard mileage may be easier to calculate, actual expenses may net you a higher deduction.