When you are self-employed, you can deduct your mileage expenses for driving for your business. Mileage deductions can be overlooked, but every cent matters when tax time comes! And, at a rate of 56 cents per mile for 2021, it would be a mistake not to claim it.
If you use a car solely for business purposes, you can claim reimbursement for every single mile. If, however, you drive a car for both business and personal use, you’ll have to work out how much mileage is for business and make a claim only on the miles driven for business.
How to Calculate Your Mileage Deductions
There are two methods you can use to work out your mileage deductions – the standard mileage rate method and the actual expense method.
The standard mileage rate method is simple and requires you to multiply your business miles by the current IRS mileage rate. There are certain qualifiers for the usage of this method.
To use this method, you must own or lease the car you drive for business and use the standard mileage rate method in the first year of driving that car for business. You also shouldn’t be using five vehicles or more simultaneously, as a fleet. However, you can switch between them.
- If you own the car, you shouldn’t have claimed depreciation deductions except by the straight-line method. You shouldn’t have claimed a section 179 deduction or a special depreciation allowance.
- If you lease the car, you must continue using this method for the entire lease, including renewals.
With the actual expense method, you can claim deductions for all expenses related to your business driving. These include depreciation, lease payments, fuel and oil, tires, repairs and tune-ups, registration fees, and insurance. This method requires that you keep track of all car-related spending which can become time-consuming.
You might qualify for both methods. Consult with your accountant or tax advisor on which method is right for your situation.
Current Mileage Rate
The mileage reimbursement rate announced by the IRS for 2021 is $0.56 per mile for business. This rate applies to cars, vans, pickups and panel trucks.
The rate is used for both mileage reimbursement from employers to employees and tax deductions for business mileage for self-employed people that use the standard mileage rate method.
Keep Compliant Mileage Records
You need to keep adequate records to claim mileage deductions. According to the IRS, adequate records should contain:
- The mileage of each business trip
- The total mileage for the year
- The time (date is enough), destination, and purpose of the trip
Your mileage records must also be timely, according to the IRS, which means they should be recorded near the time of the trip you’ve taken.
If you use your car for both personal and business use, you’ll need to have recorded the usage for each. This means you should keep a log of all business and personal trips you’ve taken and work out the share for each.
You can keep records manually with a paper logbook or a spreadsheet, or choose a mobile application for automatic mile logging. If you drive for work a lot, it might become tiresome to write down all trips manually and you might end up forgetting some, resulting in smaller deductions.
A mileage tracker app (https://www.driversnote.com/) can track trips automatically for you with all the needed details for adequate records. You’ll also be safe from losing your paper logs, as the app will keep your recorded trips always available. Just make sure the one you decide to use is IRS-compliant.
Learn more about mileage reimbursement and rules in the US in this IRS Mileage Guide (https://www.driversnote.com/irs-mileage-guide).
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