Business Vehicle Expenses – Standard Mileage Rate vs. Actual Cost

By Luci Roseman

Taxpayers using their vehicle for business purposes can choose to use the standard mileage rate or deduct the actual costs of using the vehicle.

The standard mileage rate is the simpler method and requires less recordkeeping. The taxpayer must keep a mileage log outlining the date, miles, destination and business purpose of each trip, and total miles driven during the year. The taxpayer should also keep any receipts for business related parking and tolls as these are deductible when using the standard mileage method. In 2012 the standard mileage rate for business miles will remain at 55.5 cents per mile. If the vehicle is owned by the taxpayer and the standard mileage method is chosen, the actual cost method can be chosen in a later year. If the vehicle is leased and the standard mileage method is chosen, the taxpayer must stick with that method for the life of the vehicle.

The actual cost method allows the taxpayer to deduct the actual expenses of owning and operating the vehicle including gasoline, oil, repairs, maintenance, lease payments, insurance, registration fees and depreciation. The percentage of these costs that are deductible is determined by the percentage of business miles to total miles driven. A mileage log and the receipts for any expenses that are to be deducted should be kept for back-up purposes. As with the standard mileage rate method, the taxpayer should also keep any receipts for business related parking and tolls as these are fully deductible. If the actual cost method is chosen it cannot be changed; the taxpayer cannot switch to the standard mileage method in another year.

As mentioned in the previous blog titled “Business Vehicle Expenses – Depreciation Allowed,” depreciation always reduces the basis in the vehicle, so when the vehicle is sold, the calculation of the gain or loss will be affected by the amount of deprecation taken or allowed to be taken. If you use the standard mileage method for vehicle expenses, the vehicle’s basis is reduced by a certain amount per business mile which represents the portion of the standard mileage rate treated as depreciation, but not below zero.

If you have any questions or would like more information, please contact Mary Knigge at (302) 656-6632.