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Claim Mileage with The Actual Expense Method
December 15, 2023 - 2 min read

Claim Mileage with the Actual Expense Method

Vehicle expenses can be a big expense for a lot of businesses. So, if that's the case for your business too, it is important to make sure you claim as many of these expenses as possible on your taxes.

Choose the right method for your claim

You can use one of two different methods for claiming these expenses. These methods are the standard mileage allowance, which is a per-mile allowance set by the IRS, and the actual expense method.

The right method really depends on your circumstances. The IRS suggests calculating your deduction using both methods and then choosing the method that gives you the better deduction.

The standard mileage method basically involves tracking your business miles and multiplying them by the IRS’s standard mileage rate. The actual expense method is a bit more complex, and we will explain how to use this method in this article.

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What is the actual expense method?

The actual expense method involves determining your tax deduction by tracking all of the actual expenses of using your vehicle, as the name of the method suggests. Then, you deduct the portion of the expenses attributable to your business based on the percentage of the car used for business purposes.

Some examples of typical expenses that are usually tracked and deducted are:

  • Gas
  • Depreciation
  • Repairs 
  • Lease payments
  • Registration and license fees
  • Insurance
  • Maintenance (such as oil changes)

Who can use this method?

Anyone can use the actual expense method as long as they keep track of all of their expenses for their actual expense method vehicle. This means tracking all of the expenses, such as those listed above, and keeping good records of these expenses. Be sure to keep all of your receipts and any other records of your expenses. You must be able to substantiate any expenses. Also, keep your records for three years in case you are audited.

If you do decide you want to use the actual expense method, it is a good idea to consider your situation carefully before using it the first year you claim a tax deduction for a vehicle’s expenses.

The reason for taking extra care in the first year is that if you use the actual expense method for the first year, you will not be allowed to use the standard mileage deduction in future years. Whereas, if you use the standard mileage deduction method in the first year, you will be allowed to change to the actual expense method in future years as long as you have not fully depreciated the vehicle.

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Calculating mileage deductions with the actual expense method

In order to calculate your deduction using the actual expense method, you will need to add together all of your vehicle expenses. Then you need to determine how much your car was used for business purposes. You should track your mileage to see which method gives you the better deduction. A mileage tracker app like Driversnote is good for tracking your business mileage throughout the year. The app lets you categorize each trip as business or personal.

Once you’ve added all of your expenses and determined the percentage you use your car for business purposes, you can calculate your deduction. Just take your total expenses and multiply the number by the percentage. Here is an example.

Example

You have used your vehicle for business purposes 50% of the time and have the following expenses.

Gas = $2,000

Depreciation = $5,000

Repairs = $1,000

Registration and license fees = $100

Insurance = $1,500

Maintenance = $500

The total expenses equal $10,100. You would multiply this number by .50 (50%), the percentage of your business-related driving, to get the amount of the deduction.

10,100 * .50 = $5,050

This means the tax deduction using the actual expenses method would be $5,050.

FAQ

There isn’t one way that is always better. The best way to see which choice is better is to calculate your deduction using both methods and then choose the method that gives you the bigger deduction.
If you use the actual expense method in the first year, you will not be allowed to change to the standard mileage allowance method. However, if you choose to use the standard mileage allowance method the first year, you will be allowed to switch methods as long as the vehicle is not fully depreciated.

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Manually filling out your logbook can get tedious - see how to automatically track trips for your mileage reimbursement or deductions.
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