Updated: Dec 1, 2021
The IRS has issued the 2018 optional standard mileage rates. The optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. In other words, these expenses are for your truck, car, van, SUV or RV, all your vehicles, used in your business.
There are two methods for auto deduction: the mileage method and the actual expenses method (with bonus depreciation).
The mileage method was used of the most our clients because it’s easy, simple and a large deduction. To use the mileage rates simply multiply the standard mileage rates by the number of miles. Beginning January 1, 2018, play rules were changed. The standard mileage rates for 2018 are:
5 cents per mile for business miles driven (up from 53.5 cents in 2017)
18 cents per mile driven for medical or moving purposes (up from 17 cents in 2017)
14 cents per mile driven in service of charitable organizations (currently fixed by Congress)
Personal – no deduction
If you use a car for business and personal use, you should keep appropriate records. Perhaps you are going to back out the cost of personal travel.
For example, you drive 20,000 miles in 2017. Of those miles 10,000 are for personal use, 2,000 are for charity and 8,000 are for business use. You would calculate your deduction as follow:
10,000 personal miles x 0 = 0
2,000 charitable miles x 0.14 = $280
8,000 business miles x 0.545 = $4,360
Your total deductible mileage expenses would be $4,640 plus additional related charges like parking and tolls fees.
You have one more option for deduction: actual expenses method. This method based on using the actual expenses for the vehicle and your expenses can include:
Gas and oil
Depreciation or lease payments
In the past, this method wasn’t popular because depreciation deduction was ridiculously low.
No matter how expensive the vehicle, your depreciation in the first year is $3.160 (this example is for 2014). You would take $5,100 of depreciation in 2015; $3,050 in 2016; and $1,875 in 2017 subsequent years until the car is fully depreciated (or disposed of). Thus, a $41,000 car would take about 19 years to fully depreciate!
Now with the Tax Cuts and Jobs Act, we have two incredible changes that benefit the small business owner:
Higher annual depreciation limits
Under the new law, the limits are dramatically increased for both new and passenger vehicles that are acquired and placed in service after 12/31/17 and used over 50% for business.
For vehicles placed in service (put to 100% business use) in 2018, the maximum allowances are:
$10,000 for Year 1 or $18,000 if you claim first-year bonus depreciation (see below).
$16,000 for Year 2
$9,600 for Year 3
$5,760 for Year 4 and thereafter until the vehicle is fully depreciated
So, if you buy $40,000 car in 2018, you can write-off 89% car in the first 3 years and in 6 years $40,000 car is fully depreciated. Plus, gas, maintenance, etc. That is over 80,000 in miles if you were to use the mileage method.
Bonus depreciation is a valuable tax-saving tool for businesses. It allows your business to take an immediate first-year deduction on the purchase of eligible business property, in addition to other depreciation. It doesn’t matter buy you a new car or used. It must be new just to you.
For $40,000 vehicle the bonus depreciation would be – $8,000 and $32,000 basis for standard depreciation.
Which vehicle expense method is right for you? The right method for you depends on several factors. You are going to travel a lot of business miles or you are going to buy an expensive car, or you are going to have a high MPG car, or you are going to buy a car with a lower purchase cost etc.
Remember, the best choice to decide which method of deduction to choose is the consultation of the tax adviser. Call us (800) 913-0809.
Regardless of which rate you choose, you can still deduct these additional vehicle expenses (per the percentage you use your vehicle for business):
Vehicle loan interest
Tolls and parking fees for business trips
Auto club dues
Also, it is important you always track your mileage. It will determine your business use percentage for the actual method and of course, your mileage deduction if you are using the mileage method.