Is the IRS Mileage Method Right for You?

People like the standard IRS mileage method, because it is so simple to use. If you have not read my introduction on using the standard IRS method for mileage, you can access it here: IRS Mileage Rate Intro . The standard rates for tax years 2001 throught 2004 are also listed on that page.

If you use your car(s) for business purposes, your car expenses can result in a pretty substantial tax deduction. That is why it is important to know how to calculate this deduction to your best advantage.

There are basically two methods that people use to figure their deduction: IRS Mileage and Actual Expenses.

1) The Actual Car Expense Method

When using this method to figure your car expenses you use, as the name suggests, actual expenses. You keep records of gas, lube, oil, repairs, tires insurance, auto insurance, auto loan interest and/or lease payments. You also need to figure the depreciation expense of your vehicle, or your accountant can do it for you. You also keep a mileage log of business miles driven. At the end of the year, you divide your business miles by total miles driven. The resulting number is your business use percentage.

You then multiply the business use percentage with your actual expenses to figure your car expense deducion. Sounds complicated? Don't worry if you don't get it right away, I'll show you an example later on that should make it easy to understand. For now, keep in mind that the Actual Car Expense Method requires you to keep accurate records of all your car expenses as well as a record of your IRS mileage.

2) The Standard IRS Mileage Method

When using the Standard IRS Mileage method to figure your car deduction, you simply multiply the total number of business miles with the standard IRS mileage rate for that year. Again, see the link in the first paragraph on this page for more information about the standard IRS mileage method as well as the irs mileage rate for the past four years.

Standard IRS Mileage or Actual Expenses?

Here are a few reasons why many people who qualify for the standard IRS mileage method prefer to use it:

IRS mileage method saves time and

is much easier to use, as less record

keeping is involved.

Accountants and tax pros like the IRS

mileage method (less work for them!).

Standard IRS mileage is easier to

estimate, if records are missing. It is

also easier to defend if your return

is audited by the IRS.

Sometimes (but often not!). using

the IRS mileage method results in a

better tax deduction.

Looking at these advantages, you would think that everyone would be using the standard IRS mileage method. Then, why aren't they?

First, not everyone qualifies for the IRS mileage method. You may not use the IRS mileage method if:

You depreciated your car in a previous

years tax return using the MACRS or

Section 179 methods.

You use more than one vehicle for

business at the same time . This rule

changes as of January 1, 2004.

Your vehicle is for hire (eg. a taxicab).

Some of these rules are changing beginning January 1, 2004. For more information about this, click here A couple of examples could be very useful in helping you decide whether to use the Actual Expense method or the standard IRS mileage method: Click here to review two quick examples: Standard IRS Mileage Examples.

Conclusion about the Standard IRS Mileage Method

If you reviewed the two IRS mileage examples in the link above, you see that people's circumstances are different. I often hear people say: "I always use the standard IRS mileage method." or "I never use the IRS mileage method - Actual Expenses always give a higher deduction!"

The truth is that only you know whether or not the IRS mileage method makes sense to you. Just remember that even if you are very organized, using actual expenses can be much more cumbersome and difficult to defend in an IRS audit scenario than if you had used IRS mileage. For many business owners, it is ok to forego a few dollars on their tax deduction by using the IRS mileage rate if it means knowing that they would better able to defend that deduction in an IRS audit.

On the other hand, if you spent a huge amount on, say, car repairs in a given year, the IRS mileage rate might not be your pick. The IRS mileage might not fully compensate you for those expenses. Just keep in mind, if you decide to start out with the actual expense method, this might make it more difficult to convert to the IRS mileage method in future years.

I admit that my bias is toward using the IRS mileage rate. This is probably due to my experiences with helping clients and friends over the years. However, in the end only you can decide if the standard IRS mileage method is right for you.

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