How Does The Mileage Tax Deduction Work?
We break down this crucial deduction to help you determine if you qualify, how to accurately track your mileage, the two methods for calculating your deduction, and more.
While it’s easy to avoid even thinking about tax time, proper preparation is key to maximizing your deductions and lowering your tax liability. One deduction that can save you hundreds — or more! — this tax season is the mileage tax deduction.
In this post, we’re going to break down this crucial deduction to help you determine if you qualify, how to accurately track your mileage, the two methods for calculating your deduction, and more. Keep reading to learn more and help ease the stress of the upcoming tax season.
Table of Contents
- What Is The Mileage Tax Deduction?
- How Does The Mileage Tax Deduction Work?
- Do I Qualify For The Mileage Tax Deduction?
- How To Track The Mileage Tax Deduction In 5 Steps
- Should I Use The Actual Expenses Vehicle Deduction Method Instead?
- The Bottom Line On Claiming Mileage & Vehicle Tax Deductions
- Mileage Tax Deductions FAQs
What Is The Mileage Tax Deduction?
What is the mileage tax deduction, and how important is it to your business? The mileage tax deduction is a deduction you can claim on your tax return if you meet specific conditions and use a vehicle for business purposes.
If you drive a vehicle for business purposes (such as going from your office to an off-site meeting with a client), you can deduct your mileage from your income tax return. You may also qualify for a deduction for miles driven to medical appointments or to perform volunteer work.
Looking for more tax credits for your business? Use one of these trusted ERC specialists to see if you qualify for the employee retention tax credit.
How Does The Mileage Tax Deduction Work?
As you might expect, one of the biggest questions a business owner has if they travel a lot is, “How does the mileage tax deduction work?” Any self-employed taxpayer or small business owner knows the importance of deductions, and the mileage tax deduction is a big one. This holds especially true for taxpayers that drive long distances or travel to clients often for qualified business purposes.
The mileage tax deduction is calculated by multiplying qualified mileage by the annual rate set by the Internal Revenue Service. The standard IRS mileage rate for the 2021 tax year is $0.56/miles. For qualifying trips for medical appointments, the rate is $0.16/mile. For volunteer work, the rate is $0.14/mile. This rate changes each year, so make sure you’re using current rates if you opt for this deduction.
While this is the standard method of taking a mileage tax deduction, you may instead opt to use the actual expenses method. Instead of tracking mileage, you’ll be able to write off actual vehicle expenses associated with your business. We’ll dive more into both of these methods, so keep reading.
Do I Qualify For The Mileage Tax Deduction?
In years past, many employees could take advantage of the mileage tax deduction to lower their tax liability. However, the passage of the Tax Cuts and Job Acts of 2017 changed this for many people, making it so that only the self-employed and employees in specific industries could take advantage of this deduction.
You can claim the mileage tax deduction on your income tax return if one of the following conditions apply:
- You own a small business
- You’re self-employed and file a Schedule C or Schedule F
- You’re an independent contractor
- You drive for a rideshare service
- You’re traveling for volunteer work
- You’re traveling for medical appointments
- You’re a qualified performing artist
- You work as a fee-based government official
- You’re a reservist in the armed forces
- You’re an active-duty military member that has moving expenses associated with a permanent change of station
Additionally, you will also need to determine what counts as business mileage. The following mileage is deductible:
- Travel from store, office, or another type of business location to other business-related locations (e.g., traveling to a client’s home or place of employment for business purposes)
- Travel from your home to another business location if you work from a home office
- For rideshare drivers, trips driven between your first business stop through the last stop
The following mileage is not deductible:
- Travel from your home to your store, office, or other business location
- For rideshare drivers, the trip from your home to your first stop and the trip from your last business stop to home
How To Track The Mileage Tax Deduction In 5 Steps
Taking the mileage tax deduction is just one of the ways that you can lower your tax liability. If you’ve never claimed this deduction before, get started here with these five easy steps for tracking and claiming the mileage tax deduction on your income tax return.
Step 1: Determine If You Qualify For The Mileage Tax Deduction
Before you claim the mileage tax deduction on your tax return, you must first determine if you qualify for this deduction. Mileage tax deductions can be claimed by small business owners, self-employed individuals, independent contractors (including rideshare drivers), reservists, qualified performing artists, certain government employees, and individuals that travel for volunteer work or medical appointments.
If you’re unsure if you qualify, talk to an accountant or tax professional about your specific situation.
Step 2: Choose A Method For Recording Your Mileage
There are several ways to track and record your mileage for tax purposes. A traditional mileage log, your accounting software, or even a smartphone app can be used to track your mileage throughout the year. Software like QuickBooks Self-Employed make it easy to track mileage.
No matter which method you choose, make sure to record your vehicle’s odometer reading at the beginning and the end of the year. Additionally, make sure that you’re accurately tracking personal/business mileage and keeping your records updated.
Step 3: Document Your Mileage Or Expenses
Once you’ve determined how you’ll log your mileage, make sure that you keep your records up to date throughout the year. This ensures that you accurately calculate your mileage, easily differentiate between personal and business trips, and get the most out of the mileage deduction. You’ll also be glad you kept updated records in the event of an IRS tax audit.
In your mileage log, software, or app, record the following information for each trip:
- Start/end odometer readings
- Start/end location
- Purpose of the trip
- Total mileage for the trip
This method should be used if you plan to claim the standard mileage rate. If you plan to use actual car expenses for your tax deduction, you’ll need to keep receipts and documents related to your annual vehicle expenses (i.e., car repairs and insurance). We’ll talk more about standard mileage vs. actual car expenses later in this post.
Step 4: File The Correct Tax Forms
Keeping and maintaining good records makes it easier come tax time, but you’ll also need to ensure that you’re filing the proper tax forms with your return. Here’s a breakdown of what form you’ll need to use to claim your mileage deduction:
- Self-Employed, Business Owners, & Rideshare Drivers: The mileage deduction is claimed on your Schedule C.
- Reservists, Performance Artists, & Fee-Based Government Officials: Report your miles on Form 2106: Employee Business Expenses.
- Volunteers: Qualified mileage will be included as part of your charitable deductions. This is only available for those who are claiming itemized deductions.
- Medical Appointments: Qualified mileage will be included as part of your medical deductions. This is only available for those who are claiming itemized deductions.
Depending on the form you file, you may be required to include additional information about the vehicle used, such as the date it was put into service.
Step 5: Hold On To Your Records
After you file your return, you may be required to submit documentation to the IRS to verify your mileage. Because of this, you should hold on to your records for a minimum of three years. Make sure to separate your records, receipts, and other documentation for each tax year to stay organized.
If you find that your records are taking up too much space, you might want to consider scanning your documents, using accounting software with built-in mileage tracking, or using another computer-based form of storage for future tax years.
Should I Use The Actual Expenses Vehicle Deduction Method Instead?
There are two different vehicle deductions that you can choose to lower your tax liability: the standard mile deduction and the actual expenses method. You can only choose one, so it’s important that you make the right choice to get the most out of your deduction. Keep reading to learn more about these deductions and how you can determine which one is best for your business.
Actual Expenses VS Standard Mile Deduction
|Standard Mileage Deduction||Actual Car Expense Deduction|
|Calculated using the current standard mileage rate set by the IRS||Calculated using the costs to operate the car for business use|
|Can’t write off vehicle expenses; must use standard rate per mile driven for business use||Can write off expenses including gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation|
|Tracked using a mileage log||Expenses tracked using receipts and other documentation|
|Must be used the first year the car is placed into service||If chosen for the first year car is placed into service, it must be used every year following that the vehicle is in service|
With the standard mileage deduction, you can deduct a set rate per mile when a vehicle is used for business purposes. This rate changes each year and is posted on the IRS website. You must own or lease the vehicle for which you are claiming the standard deduction. Mileage should be tracked using a mileage log.
The standard mile deduction is easy to calculate, which is why many taxpayers choose to use this option. However, in some cases, you may not be able to use the standard mile deduction. Per the IRS, you will be unable to use this option if any of the following apply:
- Your business uses five or more cars at one time
- You claimed a depreciation deduction for the car using any method other than straight-line
- You claimed a Section 179 deduction on the car
- You claimed the special depreciation allowance on the car
- You claimed actual expenses after 1997 for a vehicle you lease
To use the standard method, you must use it the first year that your car is put into service for your business. In subsequent years, you can continue to use the standard mileage deduction, or you can switch to the actual expenses method.
If you choose to use the standard deduction for a leased vehicle, you must continue to use the standard deduction for the duration of your lease, including all renewals.
You may decide that the actual expense deduction is the better option for your business. Some business owners also don’t qualify to use the standard deduction (such as businesses with a fleet of vehicles), so they must use the actual expense deduction instead.
Instead of receiving a set rate for the miles driven, this deduction allows you to write off expenses necessary for the operation of a vehicle for business purposes. These include:
- License fees
- Registration fees
- Vehicle depreciation
This method may require more record-keeping, but it could potentially result in a higher deduction than using the standard mileage rate.
One important thing to note is that if you opt to use the actual expenses deduction, you will have to continue to use that method for each year that the vehicle is being used for your business.
If you’re unsure which method is best for you, use IRS tax form instructions or online calculators to determine which gives you the larger deduction.
How To Track The Actual Expenses Vehicle Deduction
If you decide to use the actual expenses vehicle deduction, you will need to track your vehicle expenses. If the vehicle is used for business and personal use, you will only be allowed to deduct expenses associated with the business usage of the vehicle.
You can use a mileage log to determine how often the vehicle is used for tax purposes. You will also need to hold onto any receipts and documents related to any vehicle expenses.
Additionally, you will want to hold onto receipts for parking and toll fees. These expenses could potentially be deductible elsewhere on your tax return. This applies even when you use the standard mileage deduction.
The Bottom Line On Claiming Mileage & Vehicle Tax Deductions
Whether you’re a full-time small business owner or you do freelancing work on the side, doing your taxes can be stressful. One way to ease some of that tax-time stress is by lowering your tax liability with credits and deductions, such as the standard or actual expenses mileage deductions. And don’t stop there. Get the most out of your tax return by checking out our complete list of small business tax deductions that can benefit your business.