Standard IRS Mileage: Two ExamplesTwo standard IRS mileage examples:Example 1
Susan is a self employed interior designer. She started her business January 1, 2003 and began using her 1997 Toyota for business purposes at the same time. Her total mileage at year end was 10,000 miles, of which 8,000 miles were for business (8,000 /10,000=80%). Susan charged all her car expenses to one credit card, so she knows exactly what they were; they add up to a total of $3,775. Susan also keeps a mileage log. To calculate her business car deduction using the Actual Expense Method, Susan calculates:
$3,775 x .80 = $3,020
Susan is curious what she would get if she used the standard IRS mileage rate instead: 8,000 36 = $2,880 Susan's car deduction is higher by $140 using actual car expenses. She is in the 27% tax bracket and pays self employment tax (15.3%). This means that her tax savings using the actual expense method is approximately $40. See my comments below regarding whether or not she should use actual expenses or standard IRS mileage.  Example 2Bill is a self employed salesman. He just bought a new car that he will be using mostly for business. Bill is not very good at keeping records. In fact, he admits that he can't stand the task. However, two years ago Bill's s tax return was audited by the IRS, so he understands that he has to keep at least some records. After he got audited, he tried to keep a mileage log of his business miles, but he kept this up only a couple of months. Going over the mileage log for those two months with his accountant, he found that he used his car for personal purposes only about 9% of the time. With this knowledge, he now uses the standard IRS mileage method to estimate his car expenses:Bill always carries a diary planner where he books his sales appointments. At the beginning and end of the year, he writes the car odometer reading in his appointment book. Now he knows how many total miles he drove, and he has his oil change receipts to prove it. Since he knows that car usage patterns have not changed much since he got audited, he estimates that the business usage of his vehicle is still approximately 91% (100-9% personal use). At the end of each tax year, Bill subtracts the beginning odometer reading from the end reading. He multiplies this number by .91 (91%) to get his total business miles. All he then has to do is to multiply the business mileage with the standard IRS mileage rate for the tax year in question to get his car expense tax deduction. This is not a perfect system, but it works for Bill. He gets a fairly accurate estimate of his car expense deduction using the standard IRS mileage method. If the IRS audits Bill's future tax returns, they would want to see the detail of his business miles. Bill has his appointment book with his sales appointments and locations. It would just take him a few hours to fill in the miles driven to complete the records to where the IRS would accept them. Of course, this is not as good as keeping a current day to day mileage log. However, Bill's accountant feel confident that the IRS would allow his deduction as long as Bill can demonstrate how he went about re-constructing his mileage. The standard IRS mileage method allows Bill to get his car expense deduction and still not worry too much about how he would defend it in an IRS audit.
Standard IRS Mileage - CommentsThe two examples above show that people's circumstances and motivations differ. If you are very neat and organized, you may decide that the standard IRS mileage method is not for you. This is especially true if your actual car expenses are very high. Perhaps you spent a lot of money on car repairs, or you just bought a new vehicle that gives you a generous depreciation amount. Just keep in mind, that if you are going to use the car in your business for a long time, using the actual expense method could make it more complicated to use the standard IRS mileage method in future years.If you tend to be more like Bill in the above examples, the decision to use the standard IRS mileage method appears to be a no-brainer. If you are not very good at record keeping, the standard IRS mileage rate is definitely a better choice. Bottom line: you are the person who knows your strengths and limitations. Therefore, only you can decide if using the IRS mileage method is right for you!
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