If you’re self-employed and use your car for business, you can deduct certain business-related car expenses. First thing small business owners need to know is that there are two options for claiming deductions:
Actual Expenses. To use the actual expense method, you need to figure out the actual car expenses of operating the car for business use. You are allowed to deduct the business-related portion of costs related to gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments).
Standard Mileage Rate. To use the standard mileage deduction, multiply the standard mileage rate set by the IRS each year by the number of business miles traveled during the year. Normally, there is one set rate for the entire calendar year; however, in 2022, there are two rates: 58.5 cents per mile for the first six months (January through June) and 62.5 cents per mile for the last six months (July through December). For details, see Standard Mileage Rates Increase for Remainder of 2022, below.
No matter the method used, you can deduct car expenses separately.
WHICH METHOD IS BETTER?
Using the standard mileage rate produces a larger deduction for some taxpayers. Others fare better tax-wise by deducting actual expenses. Whether you own or lease your car, you may use either of these methods.
To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Thereafter, you can use the standard mileage rate or actual expenses. If you choose the standard mileage rate and lease a car for business use, you must use the standard mileage rate method for the entire lease period – including renewals.
Opting for the standard mileage rate method allows you to bypass certain limits and restrictions and is simpler. For the average individual, it can often be more beneficial dollar wise as well. Generally, the standard mileage method benefits taxpayers who have less expensive cars or travel many business miles.
The standard mileage rate may understate your car expenses, especially if you use the car 100 percent (or close to it) for business.
DOCUMENTATION OF CAR EXPENSES
Tax law requires that you keep travel expense records and show business versus personal use on your tax return. Furthermore, if you don’t keep track of the number of miles driven and the total amount you spent on the car, your tax advisor won’t be able to determine which of the two options is more advantageous for you at tax time. It is essential to keep careful records of your travel expenses and record your mileage. If you use the actual expenses method, you must keep receipts.
You can use a mileage logbook or, if you’re tech-savvy, an app on your phone or tablet. Additionally, there are several phone applications are available to help you track your business expenses, including mileage and billable time. These apps also allow you to create formatted reports that are easy to share with your CPA, EA, or tax preparer.
To simplify your recordkeeping, consider using a separate credit card for business.
STANDARD MILEAGE RATES INCREASE FOR REMAINDER OF 2022
The optional standard mileage rate increases to 62.5 cents per mile, effective July 1, 2022. Taxpayers may use this rate to calculate the deductible costs of operating an automobile for business purposes. Subsequently, the new mileage rate is up 4 cents from the rate effective at the start of the year.
The optional business standard mileage rate uses the deductible costs of operating an automobile for business. In addition, this rate is used as a benchmark by the federal government and many businesses to reimburse their employees for mileage. Taxpayers have the option of calculating the actual costs of using their vehicle rather than using the standard rates.
The rate for deductible medical or moving expenses increases for the remainder of 2022, to 22 cents per mile. This new rate is up 4 cents from the rate effective at the start of 2022.
Furthermore, taxpayers should note the statute remains unchanged for the 14 cents per mile rate for charitable organizations.
The rate increases are a special adjustment for the final months of 2022 in response to recent gasoline price increases. Certainly, while fuel costs are a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance, and other fixed and variable costs. Midyear increases in the optional mileage rates are rare. The last time the IRS made such an increase was in 2011.
QUESTIONS ON CAR EXPENSES?
Don’t hesitate to call and find out which deduction method is best for your particular tax situation.