How to use the Standard Mileage Rate when filing your taxes?
- telmoriomar
- Jan 21, 2021
- 3 min read
Updated: Jan 31, 2021
As self-employed workers, you can take tax deductions for your driving expenses that can substantially lower your taxes. However, you will need to carefully track these deductions yourself in case the IRS chooses to audit your taxes.
The most important tax deduction for professional drivers is the deduction of car expenses, since it will be your biggest driving expense. There are two ways to claim this deduction.
a) Standard Mileage Rate, which is a standard rate used by the IRS – Where you have the miles driven professionally multiplied by the standard IRS rate (57. 5 cents in 2020 and 56 cents in 2021). This rate includes fuel costs, repairs, and maintenance, as well as vehicle depreciation. This is the more common and easiest option.
b) Actual expenses of the car – Where you track all expenses during the professional use of the vehicle, like fuel, repairs, and maintenance, also the annual depreciation of the vehicle.
If you use standard mileage, you cannot deduct other costs associated with your car, including gas, repairs, maintenance, insurance, depreciation, license fees, tires, car washes, lease payments, towing charges, etc. Standard mileage includes all of these expenses. However, you may include tolls, parking fees and other small expenses, such as professional use apps and a professional phone line.
Which method to use?
There are pros and cons to each method. If you want to keep it simple, standard mileage may be best. Besides being the most used. However, if you drive a higher value vehicle or a truck, for example, you can choose the method of “actual expenses", considering that there will be a high deduction in terms of depreciation of the vehicle. You can also consider this option if you paid a lot for car upkeep during the year.
Tracking actual car and truck expenses requires detailed registration. You must keep track of all expenses and receipts related to your car, in addition to number of miles driven for work and for personal purposes.
The strategy is: fully commend your expenses, try both calculations and determine which method is best. However, it is highly recommended, when choosing a method, to continue using the same method while driving professionally in order to avoid IRS audits.
If you choose to get help filing your tax return, call us: 508-863-2262
What miles can be deducted?
Not every mile counts as a tax deduction. The following are eligible for tax deductions: miles within your work route; miles driven to pick up passengers; miles driven with a passenger in the car; miles driven returning from drop-off points to a place to wait; any other mileage related to the business.
Remembering - the first drive of the day, from your home to the location where you start to work, cannot be deducted for business mileage. Likewise, your last ride commuting home cannot be deducted. These miles are considered commuting miles, which are not deductible. In addition, any driving done for personal reasons during the day (picking up lunch, running an errand), cannot be deducted. Even if they are done between rides.
How do you keep a mileage record?
The IRS is strict about how you must log miles for tax deductions, so it’s important to plan out how you will keep records before you start driving. Here are some tips that can help you:
Keep all receipts for your car expenses, including fuel, repairs, and maintenance. Try separate bank account or credit card for business expenses. Record mileage on paper or in a spreadsheet. To record your mileage for each trip, you will need to note the following items: date, starting and ending location, purpose of the business trip, trip-related expenses like tolls and parking fees.
You will also need to track how many total miles (personal and business) you drove for the year. You can note your start and end odometer miles at the beginning and end of the year. Then you’ll subtract your logged business miles to get your personal miles.
However, the easiest method to track miles is to download a mile-tracking app. There are many app options like SherpaShare or Stride Tax. Both apps work by using the location on your phone to track mileage automatically. All you need to do is turn on the app and start the tracking mechanism. Both apps produce a mileage log that you can use if you are audited by the IRS.
If you have not tracked your own mileage in the past year, you can use the rideshare companies records, the addresses visited on your past routes, and other methods to assemble a mileage record. Unfortunately, this can be an arduous task, so it’s always better to record mileage from the beginning.