As a business owner looking to maximize your tax deductions, it is important to consider your vehicle expenses. Choosing between the standard mileage deduction and actual vehicle expenses can impact your tax liability. In 2024, the standard mileage deduction is computed using 67 cents per mile driven for business use, which increases to 70 cents per mile in 2025. Using your actual vehicle expenses may or may not provide you with more than what the standard method can offer. In this article, we'll walk you through the factors to consider when deciding which method to use and provide insights into what could result in a “go-to” method for you.
Up-front Depreciation Deduction
The actual vehicle expenses method allows for up-front depreciation deductions, which can be beneficial. For instance, in 2024, you could enjoy a 60% bonus write-off in the first year for your SUVs or trucks that exceed 6,000 lbs. Consider your need for this up-front deduction and how it aligns with your tax rates.
Projected Costs per Mile Over the Life of the Vehicle
When calculating your costs per mile you would consider the total of gas, insurance, registration fees, repairs, and other expenses that would be incurred divided by the total estimated miles of the car. Then, you would divide that amount by the number of years you will hold the vehicle (aka economic depreciation) – it could be that you plan to run the car until it’s dead or it will be traded for another after a couple of years. By comparing the calculated depreciation with other actual expenses against the standard mileage deduction, you can choose the method that provides the greatest tax benefit. This allows you to make an informed decision that maximizes your potential savings.
Note: Previously, like-kind exchanges were allowed for vehicles, allowing tax-deferred exchanges. However, be aware that this option is no longer available for vehicles. Selling or trading a vehicle in will trigger income if the depreciated cost is smaller than its value.
Making the Decision
Newer and Expensive Vehicles: For vehicles with high business use and significant upfront cost, like a 90% business-use Ford F-350 costing $80,000, the actual vehicle expenses will be the desired method due to the accelerated depreciation benefits.
Newer and Low Holding Period: For vehicles that are newer and will only be kept for a couple of years should take the actual expense deduction, since the per mileage economic depreciation is typically a lot higher with that method.
Older and Inexpensive Vehicles: Vehicles with limited business use and lower initial costs, such as a 20% business-use Honda Civic costing $10K, are better suited for the standard mileage deduction.
Middle Ground: For vehicles falling in between, some calculations may be necessary to determine the most cost-effective method. It will be important to consider your need for an up-front depreciation deduction and the projected costs per mile over the life of the vehicle to compare these to the standard rate.
When deciding to take actual vehicle expenses, beware that you will not be able to switch to the standard method of deduction if you do not use the standard method in the first applicable tax year. Therefore, if you are currently taking the standard mileage deduction, you can make the switch to actual vehicle expenses if it provides the optimal deduction for you.