The Mileage Allowance Method
Deducting your business-related car, truck, van, and SUV expenses can slash your taxes substantially, saving you hundreds, even thousands of dollars!
There are two methods for figuring your deduction:
- The Mileage Allowance Method
- The Actual Expense Method
The Mileage Allowance Method
The mileage allowance method uses an IRS flat rate to determine the deduction for business-related miles traveled in your vehicle during the tax year. This makes it quite simple to figure your deduction.
The business mileage allowance rate tends to change each year. The 2016 rate is 54 cents per mile. Under the allowance method you don't have to save receipts or compute depreciation.
The mileage rate takes into account vehicle operating expenses and depreciation. It does not take into account, tolls, parking fees, towing expenses, or interest on a car loan. Therefore, to figure your total deduction, add these additional expenses, if any, to your mileage allowance.
Interest On a Car Loan
Self-employed individuals may deduct interest on a loan for a vehicle used for business. Unfortunately, employees may not claim interest on a car loan even if the vehicle is used 100% for the job.
If you use your vehicle 100% for business, you may deduct 100% of the interest of a loan for that vehicle. However, if you use your vehicle less than 100% for business, then the amount of interest you may claim depends on your business-use percentage.
- Your annual business mileage is 28,000 miles.
- Your total annual mileage, including business and non-business miles is 40,000 miles.
- Your business-use percentage is 70% (28,000/40,000).
- Your business mileage allowance for tax year 2016, before adding any interest, is $15,120 (.54 x 28,000)
You paid $1,500 in interest on a loan for the car you use for business.
- You may deduct interest of $1,050 (70% x $1,500).
- The remaining non-business-related interest, $450 (30% x $1,500), is a nondeductible personal expense.
You paid $50 for tolls and parking on business trips.
You may deduct a grand total of $16,220 in car expenses ($16,100 plus $1,050 plus $50).
Personal Property Tax
You may also claim as part of your vehicle deduction the personal property tax portion of your registration fee if you live in a state that bases part of its registration fee on the value of the vehicle rather than its weight, model, year, or horsepower. Call your DMV to find out.
Again, the amount of the personal property tax you may claim as a business expense depends on your business-use percentage. You figure your deduction the same way as in the above interest example.
However, the non-business portion of the personal property tax paid may be claimed on Schedule A, Form 1040 as an itemized deduction.
It's important to keep a mileage log so you have a place to capture the information you need to support your deduction. Without written evidence of your business miles, the IRS may disallow your deduction if you're audited.
Your mileage log should include:
- Dates traveled
- Names of clients/customers visited
- Business purpose of trips
- Beginning and ending odometer reading for each trip
- Total miles traveled on each trip
- Weekly and monthly summary of miles traveled
- Total annual miles traveled
If you have a pattern of business use, the IRS may allow you to record your mileage for a representative part of the year instead of the whole year (e.g., four months). This may be the case if you tend to visit the same clients and do little driving soliciting new clients.
Schedule C provides a place to enter specific information about your vehicle if you used it for business purposes. For example, the date you placed your vehicle in service for business purposes and whether you have evidence to support your deduction.
In addition, you must also enter your annual mileage for business use, commuting, and other purposes.
If you start out using the mileage allowance method for a leased vehicle, you must continue using it for the entire lease period, including renewals.
Where to Claim the Business Mileage Allowance
Claim the business mileage allowance Schedule C, line 9. On the back of Schedule C, Part IV, there are three bits of information you must include:
- Business miles
- Commuting miles
- Other (this is personal miles excluding commuting miles)
Multiply your business miles by the IRS business mileage rate.
You must also check "Yes" or "No" to four questions:
- Do you (or your spouse) have another vehicle available for personal use?
- Was your vehicle available for personal use during off-duty hours?
- Do you have evidence to support your deduction?
- If "Yes", is the evidence written?
If you are an employee and use your car for your employer's convenience and were not reimbursed for your expenses, use Form 2106 to report your unreimbursed expenses.
Enter your total unreimbursed expenses on Schedule A, line 21 as a miscellaneous itemized deduction which is subject to the 2% of adjusted gross income (AGI) floor. This means, your total miscellaneous deductions must exceed 2% of your adjusted gross income to get any tax benefit.
If your employer reimbursed you at a rate lower than the IRS allowance, you may use the IRS rate to deduct the excess over your employer's reimbursement.
Qualified Plug-in Electric Vehicles and Fuel Cell Vehicles
Use Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit to figure your credit for qualified plug-in electric drive motor vehicles you placed in service during your tax year. Also use Form 8936 to figure your credit for certain qualified two-wheeled or three-wheeled plug-in electric vehicles acquired after 2011.
Use Form 8910, Alternative Motor Vehicle Credit to claim a credit for certain alternative motor vehicles.
The credit for hybrid vehicles, alternative fuel or advance lean-burn technology vehicles is no longer available. This credit was only allowed for these vehicles if purchased before 2011. The credit for plug-in electric vehicle conversions expired for conversions made after 2011.
When You May Not Use the Mileage Allowance Method
You may NOT claim the IRS business mileage allowance if:
- You did not use the flat IRS allowance the first year your vehicle was placed in service for business use. For example, you claimed actual expenses in 2015. You may not use the mileage allowance in 2016 or any other year for that same vehicle.
- You have depreciated your vehicle using the ACRS or MACRS methods, including straight-line MACRS
- You claimed first-year expensing
- You claimed first-year bonus depreciation
- You use five or more vehicles simultaneously in your business, such as a fleet of cabs or limousines.
- You use your vehicle for hire (i.e. taxi cab, limo service).
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- Return to the Business Deductions Table of Contents to find related links