Actual Expense Method Versus Standard Mileage Rate

You're allowed to deduct your driving expenses when you drive your car for business. The two ways to calculate your deduction are:

• using the standard mileage rate, or
• deducting your actual expenses.

Most people use the standard rate. But you might be able to deduct more if you use the actual expense method.

Using the Standard Mileage Rate vs. the Actual Expense Method

With the standard mileage rate, you deduct a set amount for each business mile you drive. The IRS sets the amount each year. For 2023, the standard mileage rate is 65.5 cents per business mile.

When you use the standard rate, you don't need to keep track of how much you actually spend for gas, repairs, and other car expenses during the year. All you have to do is track your business mileage and total annual mileage. Most people use the standard mileage rate because it's the simplest and easiest method.

If you use the actual expense method, in addition to tracking your mileage, you must keep track of all your car expenses, including gas, insurance, and repairs. You then deduct the business percentage of these expenses.

You're also allowed to deduct an amount for depreciation each year. However, unlike with other business assets, tax law strictly limits the depreciation deduction for passenger automobiles. (A passenger automobile is any four-wheeled vehicle made primarily for use on public streets and highways that has an unloaded gross weight of 6,000 pounds or less.)

Annual Limits on Passenger Vehicle Depreciation

As a result of the tax reform law that took effect in 2018 (the Tax Cuts and Jobs Act), the annual limits on passenger vehicle depreciation are much higher than they used to be.

See below for the maximum annual depreciation deduction allowed for passenger automobiles placed in service in 2023.

If you placed a passenger vehicle into service in your business in 2023, you may take a maximum depreciation deduction of $12,200. The second year, you may deduct a whopping $19,500. That's $31,700 in depreciation deductions in the first two years.

You may deduct up to $8,000 more the first year if your vehicle qualifies for bonus depreciation. However, you may take bonus depreciation only if you use your car for business over 50% of the time during the year. The annual maximum limits are based on 100% business use of a passenger automobile.

So, if you use your car less than 100% for business, you must reduce your limit accordingly. For example, if you use the vehicle 40% of the time for personal use, your annual deductions are reduced by 40%. Moreover, your actual depreciation deduction, up to the annual limit, depends on the cost of your car.

Straight-Line Method vs. Accelerated Depreciation

Moreover, your actual depreciation deduction, up to the annual limit, depends on the cost of your car and how much you drive for business. If you drive less than 50% for business, you must use the slowest method of depreciation, called the "straight-line method."

If you drive more than 50% for business, you may use accelerated depreciation that gives you larger deductions in the first few years.

The amounts you can deduct each year with these methods are shown in the following chart:

If you use the standard mileage rate, you only get to deduct 65.5 cents (2023) for each business mile you drive . You get no additional deduction for depreciation (the standard rate includes depreciation).

So, you can get much larger deductions in the first several years after you purchase a car for business using the actual expense method instead of the standard mileage rate, particularly if you purchase an expensive vehicle.

Choosing Whether to Use the Standard Mileage Rate or the Actual Expense Method

To be safe, you might want to keep track of all your expenses and mileage the first year you purchase a new car for business. Then, when you do your taxes for the year, you can calculate what your deduction would be using both methods.

You can then choose whether to use the actual expense method. If you do so, though, you'll have to continue to use this method for as long as you own your car. You're allowed to use the standard mileage rate only if you use it the first year you use your car for business. See Using the Standard Mileage Rate to Deduct Business Expenses for more information.