Ultimate Guide to Car Tax Deductions and Mileage
If your freelancing, 1099 contracting, or small business involves driving, then you can claim car-related tax write-offs.
Owning a car isn’t cheap, so this move can provide a significant source of tax deductions. Let’s dive (drive?) in!
Who can deduct car expenses?
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.
You also don’t need to drive year-round. If you only drive for work during the summer, you can still write off car expenses during those months.
"Commuting" doesn't count
According to the IRS, "commuting" doesn't count as driving for work.
What does that mean? For the IRS, "commuting" is any driving you do between your home and a separate, dedicated place of work — like an office or a coworking space.
If you work primarily from home, though, any driving to and from work-related meetings and errands counts!
How to write off car expenses
There are two ways to claim car-related write-offs: keeping a mileage log, or (more easily, in our opinion) claiming a percentage of all your car expenses.
Standard mileage method
With this method, you keep track of how many miles you actually drive for work. Then, you multiply each mile by a standard amount set by the IRS.
This is $0.56 per mile for 2021, but it changes every year!
The IRS introduced this option In the late '90s. At the time, it was intended to simplify the recordkeeping process of tracking car expenses. In those days, after all, you'd have to go through the hassle of using something like a 1099 Excel template to track everything you spent on your car.
These days, though, modern apps (like Keeper Tax!) allow you to scan and categorize your credit card transactions automatically. That makes the actual expenses method a lot more convenient to use.
Actual expenses method
Instead of tracking every single mile you drive, you can just deduct a percentage of all your car-related expenses. This is called your “business-use percentage” — that is, how much of your driving you do for work.
What's better: Standard mileage or actual expenses?
Some freelancers have been led to believe that the standard mileage method will get them a bigger tax break. For most people, that’s not true.
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.
However, there are some situations where the standard mileage method might actually be better for you:
- You drive a lot for work — over 30,000 miles per year. If your work requires you to be constantly on the road, like rideshare driving, then tracking mileage might get you a bigger tax deduction.
- Your car is old, but gas-efficient. The actual expenses method lets you deduct depreciation on newer vehicles, and the cost of gas. If neither is relevant to you, consider the standard mileage method.
- 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, most electric cars are expensive to buy, insure, and maintain. So car expenses might still win.
The actual math is complicated, and it depends on lots of different factors. Check out our detailed breakdown for more examples.
Which car-related expenses can I write off?
There are two types of car expense write-offs: expenses you can only deduct with the actual expense method, and expenses you can deduct with both methods.
What you can write off with the actual expenses method
These expenses replace the mileage-based deduction you take with the standard mileage method.
- Lease payments
- Cost of the car
If you finance your car, then you can write off your own car payments. If you bought it a few years ago, you can even write off a portion of the car's original cost. (This is called “depreciation”).
What you can write off with both methods
Even if you go with the standard mileage method, you can claim these deductions on top.
- Car washes
- DMV fees
Here's a chart summarizing the two types of vehicle expenses.
Calculating your business-use percentage
If you go for the actual expenses method, you’ll have to determine your business-use percentage. To figure this out, you need to estimate how much of your driving mileage is “driving for work,” as opposed to personal errands and commuting. Don’t worry -- it’s not an exact science.
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%.
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.
Wait, so should I track miles at all?
Tracking miles is a hassle. Even the fanciest mileage tracking apps drain your battery life and force you to categorize every trip you take.
Instead of relying on them, we recommend taking a quick look at your odometer at the beginning and end of the year. Then, at tax time, use a tool like Keeper Tax to scan your transactions for car expenses.
In short, don’t sweat it. If you get audited, you can always use your Google Maps location tracking history, or calendar events, to figure out the miles you drove.
At the end of the day, there’s a big difference between tax fraud and an honest misestimation. If you get audited and find that you’re a bit off, you’ll just have to pay the difference, plus a small fine.
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