Standard Mileage Rate vs. Actual Expenses: Which Is Better?

How to calculate both so you can decide which is better for your business taxes

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If you have a vehicle that you use for your business, you may be able to deduct certain expenses on your taxes. You must meet certain requirements in order to take these write-offs and there are two methods to consider: the standard mileage rate or the actual vehicle expenses. Here's how both work so you can decide which is right for your business tax situation.

Key Takeaways

• The standard mileage rate is a flat rate per mile that helps you easily calculate your tax deduction for business-related car travel.
• The actual expenses method is when you total up all of your car's expenses, figure out how many miles were for business, and then calculate your tax deduction.
• There are rules around using one vs. the other, so consider both before choosing which one gives you the larger tax deduction for your business during tax season.

What Is the Standard Mileage Rate?

The first option for deducting driving expenses is to use the standard mileage rate. In this deduction, you will calculate the total miles driven and multiply it by the standard mileage rate.

The standard mileage rate changes per year. For the 2022 tax year, there were two standard mileage rates because of the high price of gas:

• January to June: 58.5 cents per mile
• July to December: 62.5 cents per mile

How To Calculate the Standard Mileage Rate

Let's say you drove 50 miles to and from your small business every month in 2022. If we use the standard deduction, the calculation looks like this:

50 miles x 58.5 cents x 6 months = 175.5

50 miles x 62.5 cents x 6 months = 187.5

175.5 + 187.5 = 363

Who Can Take Deductions Using the Standard Mileage Rate?

You can make deductions using the standard mileage rate if:

• You have used the standard mileage rate since you first leased or bought the car.
• You have leased a car and intend to use the standard mileage rate deduction for the entirety of the lease
• You use four vehicles or fewer in your daily business operations

You cannot use the standard mileage rate if:

If you use the standard mileage rate you cannot deduct:

You can still deduct business-related expenses like:

• Parking fees and tolls
• Interest if you have a loan on the car
• Applicable registration fees and any taxes

Note

You can switch to using the actual expense method in later years even if you first began using the standard mileage rate. However, you cannot use accelerated depreciation. You will have to use the straight-line method of depreciation.

What Is the Actual Expenses Method?

The other option available for deducting driving-related expenses is the actual expenses method. You can use this method if you are not able to use the standard mileage rate or if you simply choose not to. The actual expenses method requires you to total up your car's expenses like gas, registration fees, parking fees, tolls, lease payments, and more (see below).

You must use the actual expenses method if:

• You have a fleet of vehicles (more than four) used simultaneously for your business activities
• You lease a car and do not plan on using the standard mileage rate for the entirety of the lease
• You used the actual expense calculation when your vehicle was first used for business purposes

What Are the Actual Expenses You Can Deduct?

When you use the actual expenses method to calculate your tax deduction for business travel on a car, you can add up and deduct the following expenses:

• Interest on a vehicle loan
• Vehicle depreciation (leased vehicles cannot be depreciated)
• Registration fees and tax
• Parking fees and tolls
• Garage rent
• Lease payments
• Insurance
• Gasoline
• Oil
• Maintenance
• Repairs
• Insurance
• Tires
• Registration fees

Note

For lease payments, an income inclusion amount must be subtracted from the amount you can deduct if the vehicle’s value is above a certain amount. This amount changes yearly so be sure to check with the IRS or your accountant.

How Much Can You Deduct With the Actual Expenses Method?

You can only deduct the portion of the expenses that was used for business. So if 60% of your driving was for business, you can deduct 60% of the expenses.

How To Calculate the Actual Expenses Deduction

Let's say you drove 10,000 miles in 2022, but only 6,000 were for business. That's 60% of the miles driven for the year. Your actual car expenses for all 10,000 miles in 2022 were \$3,000.

The calculation would look like this:

60% x \$3,000 = \$1800

Standard Mileage Rate vs. Actual Expenses, Which Is Better?

The best method depends on a number of factors. It depends on the vehicle you drive and the operating costs of the vehicle.

If your vehicle gets great gas mileage, then taking the standard mileage deduction will likely be more beneficial for you. If your vehicle has very high operating costs and low gas mileage, then taking the actual expense deduction may produce better savings for you.