Ultimate Guide to Car Tax Deductions & Mileage
If your freelancing, 1099 contracting, or small business involves driving, then you can claim car-related tax write-offs. You can do so by keeping a mileage log, or (more easily, in our opinion!) you can simply claim a percentage of all your car-related expenses. Owning a car isn’t cheap, so this move can provide a significant source of tax deductions. Let’s dive (drive?) in!
What counts as “driving for work”?
You don’t have to be a rideshare driver or a self-employed traveling salesperson to claim car-related tax deductions. Even if you work primarily from a home office, the occasional supply-run or trip downtown counts. Also, you don’t need to drive all year long -- if you only drive for work during the summer, you can still write off car expenses during those months.
The only exception is what the IRS calls “commuting.” If you work from a formal office space (think: your lease payment is a tax deduction), then driving between your home and the office is not considered “driving for work.” However, if you work primarily from home, then any driving to and from a work-related meeting or errand counts!
Which car-related expenses can I write off?
As a rule of thumb, a percentage (called the “business-use percentage”) of all your car-related expenses is tax deductible.
It’s not just gas -- you should be claiming dozens of car-related expenses the typical car owner pays.
If you finance your car, then you can write off your own car payments. You can even write off a portion of the original cost of the car even if you bought it a few years ago (this is called “depreciation”).
Some of these expenses, outlined within the gray box, are considered ordinary car expenses. You can choose to replace these with the standard mileage deduction (more on that later).
Other car-related expenses -- such as parking and toll fees, car washes, new floor mats, and more -- can be claimed on top of ordinary car expenses, regardless of whether you choose to claim mileage or not.
Calculating your business-use percentage
How much can you deduct from your taxes for using your car as work? For almost all car-related expenses, the amount you can claim as a tax write-off depends on your business-use percentage. To calculate this percentage, you need to estimate how much of your driving mileage is “driving for work,” as opposed to personal errands and commuting.
For example, if you typically drop off your kids at school in the morning and then use the car for work errands and meetings throughout the day, then your business-use percentage might be 75%. Don’t worry -- it’s not an exact science.
Contrary to what some ultra-conservative accountants might tell you, you don’t have to keep a line-by-line mileage log of everywhere you’ve ever driven in order to calculate this percentage. If you’re nervous, take a slightly lower percentage.
The standard mileage deduction
In the late 90’s, the IRS introduced the mileage deduction as an alternative way to claim car-related tax write-offs. That way, instead of claiming ordinary car expenses -- such as gas, insurance, and maintenance -- freelancers can instead keep a mileage log and deduct 57.5 cents per mile (note: the exact amount changes every year).
Originally, the standard mileage deduction was meant as a way to simplify the record keeping process of tracking car expense receipts. Before, you would have to go through the hassle of using a 1099 excel template. However, modern apps (like Keeper Tax!) now allow you to scan and categorize your credit card transactions automatically.
What’s better -- car expenses, or the mileage deduction?
Some freelancers have been led to believe that the mileage deduction will get you a bigger tax break than car expenses. For most of us, that’s not the case.
We generally recommend using car expenses instead of mileage. It’s easier (no need to keep a mileage log!), and unless you’re a voracious driver or have a very old car, it usually results in a bigger tax break.
As you can probably imagine, the math is complicated and depends on lots of different factors. Check out our detailed breakdown for more examples.
Below are some reasons why you might want to replace car expenses with the mileage deduction:
- You drive a lot for work - over 30,000 miles per year. Let's say you are a full-time Instacart 1099 worker. That work requires you to be constantly on the road, like rideshare driving, then it’s possible that mileage will get you a bigger tax deduction than car expenses. Remember: commuting doesn’t count as “driving for work.”
- Your car is old, but gas efficient. If you bought a Prius eight years ago, then you won’t be able to claim depreciation on the cost of the original purchase, and it’s unlikely that your gas costs will outweigh the mileage rate.
- You drive an electric vehicle. Since you don’t spend money on gas with an electric car, it’s likely that the mileage deduction will get you a bigger tax break. That said, since most electric cars are expensive to buy, insure, and maintain, car expenses might still win.
Wait, so should I track miles at all?
Like the paper receipts myth, the way you track miles for taxes is commonly misunderstood. It’s a big hassle and not actually required if you claim car expense tax deductions.
Our recommendation: don’t stress it
Tracking miles is a hassle. Even the fanciest mileage tracking apps drain your battery life and require you to constantly categorize every trip you take.
Instead, we recommend taking a quick look at your odometer at the beginning and of the year. Then, at tax time, use a tool like Keeper Tax to estimate your 1099 tax bill, scan your card and bank transactions for car expenses. In short, don’t stress it.
At the end of the day, record keeping is an honor system. Contrary to their reputation, IRS agents aren’t monsters -- you can always use your Google Maps location tracking history or calendar events in case of an audit. There’s a big difference between tax fraud and an honest mis-estimation. If you’re a bit off and get audited, you’ll have to pay the difference plus a small fine.
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