Fuel Expense Write Off or a Mileage Tax Deduction?

For people who use vehicles for work, their vehicle costs, and money spent on gas can all be significant expenses by the end of the year. Understanding how to calculate costs best is imperative, especially if you operate on a larger scale. Currently, the IRS allows two ways to calculate expenses: the standard mileage rate and actual vehicle expenses. Let’s break down the pros and cons of each strategy, and how using a professional service like Flexkeeper can help minimize confusion.

Breaking Down The Actual Expenses Method

The actual expenses method for vehicles allows you to deduct the precise costs of operating your car or truck for business purposes. With this method, you can write off expenses like gas, oil, repairs, insurance, registration fees, lease payments, and depreciation based on the business use percentage. To use this method, you need to keep detailed records of all vehicle-related expenses throughout the year and log how much the vehicle was used for business versus personal purposes.

Below is an explanation of who can use this method to calculate expenses:

Small Business Owners: Anyone who uses their vehicle extensively for business purposes may find this method beneficial for deducting specific, high-cost expenses.
Freelancers & Contractors: Independent workers who frequently travel for client meetings or job sites can use this method to maximize deductions on business-related vehicle use.
Real Estate Agents: Agents who drive often to show homes or meet clients can deduct actual costs like fuel, insurance, and maintenance.
Delivery & Transportation Workers: Individuals whose job requires driving, such as couriers or rideshare drivers, can deduct vehicle expenses based on their business use percentage.
Self-Employed Professionals: Those who use their vehicle for client visits, business errands, or transporting materials may benefit from detailed expense tracking.

Advantages Of Using The Actual Expense Method

This method has several advantages for tax benefit purposes. If your vehicle’s operation costs are high, it could make a lot of sense. By deducting the actual costs of gas, insurance, repairs, maintenance, and depreciation, this method allows for more accurate deductions tailored to your business use. It can lead to larger tax savings than the standard mileage rate, particularly if your vehicle is expensive to maintain or drive long distances for business. You also have to consider there are wider opportunities to claim tax deductions and that there’s no limit to how much you can deduct for vehicle expenses.

Disadvantages Of Using The Actual Expense Method

The actual expenses method has several disadvantages that could make it less appealing for taxpayers. The first drawback is the meticulous record-keeping you need to have. It’s imperative to keep track of all vehicle-related expenses, including receipts and mileage logs. This can be time-consuming and require much effort, especially for those who use their vehicle frequently and for multiple purposes. The IRS may disallow some or all of your deductions if you don’t have detailed records. Another major disadvantage is the complexity of calculations involved in this method. You need to determine how much of each expense is deductible based on your business use percentage, which could vary from month to month.

Breaking Down The Mileage Tax Deduction

The mileage tax deduction is a simpler method that involves multiplying your business miles by the IRS’s standard mileage rate for the tax year. In 2024, you can claim $0.67 per business mile driven for tax deductions. To use this method, you must keep track of your business miles throughout the year and have a mileage log showing the date, destination, purpose of each trip, and the number of miles driven.

Below are some examples of who can benefit from using this method:

Sales Representatives: This method allows those who travel frequently to meet clients or make sales calls to easily track their business mileage and save on taxes.
Service Providers: Professionals like plumbers, electricians, and contractors who travel to job sites can also use this method for tax deductions.
Remote Workers: Employees who work from home but occasionally travel for business purposes can use the mileage deduction method.

Advantages Of Using The Mileage Tax Deduction Method

There are several advantages to using this method, mostly centered around how easy it is to use. Taxpayers only need to keep a log of the miles driven for business purposes without needing to track every vehicle-related expense, such as gas, insurance, or repairs. This reduces the burden of maintaining detailed records and makes tax filing much quicker and easier. The standard mileage rate covers general wear and tear on the vehicle, making it ideal for those who prefer a hassle-free approach. This method is especially beneficial for individuals with lower vehicle expenses or those driving shorter distances for business, as it provides a consistent, straightforward way to claim deductions.

Disadvantages Of The Mileage Tax Deduction

There are a few drawbacks taxpayers might want to consider if they use the mileage tax deduction. Your deduction could be lower if your vehicle expenses are high. Aspects like fuel, repairs, insurance, and depreciation are not considered when using this method, meaning you could miss out on potential tax savings. The standard mileage rate is set by the IRS and may not accurately reflect your vehicle’s actual expenses. You cannot deduct any other expenses related to the vehicle if you use this method. The mileage tax deduction might not benefit those with high operating costs or needing more deductions for their business-related driving. Again, it’s important to note that you must choose one method or the other, you cannot utilize both.

How To Choose The Right Method for Your Business

Choosing between the actual expense method and the mileage tax deduction depends on several factors unique to your business operations. Start by evaluating your vehicle’s annual expenses and usage patterns. If your vehicle-related costs, such as fuel, maintenance, and insurance, are particularly high, the actual expense method may offer significant tax savings. However, if you prioritize simplicity and have lower vehicle expenses, the mileage tax deduction can streamline the process considerably.

It’s also essential to consider your business’s structure. Small business owners, freelancers, and contractors who frequently travel for work might benefit more from the detailed deductions the actual expenses method allows. Conversely, individuals who prefer time-saving solutions and use their vehicles extensively might find the mileage deduction more convenient.

Contact Flexkeeper To Help Your Small Business Benefit With Tax Savings

A virtual assistant like Flexkeeper can help you track your expenses accurately and manage your mileage logs, making it easier to choose the most advantageous method for tax deductions. Flexkeeper simplifies record-keeping and allows you to claim accurate deductions without any hassle. Contact us today to learn more about how our services can benefit your business’s tax savings. By choosing the right method for your business and utilizing tools like Flexkeeper, you can optimize your tax deductions and save money on vehicle-related expenses. Start keeping track of your business miles and expenses today, and watch your tax savings grow!