The IRS allows you to deduct either cents per mile or “actual costs” for business driving. It’s easier to deduct cents per mile (53.5 cents in 2017) but how do you know if that will yield the biggest deduction?
The general rule of thumb is: the more expensive your vehicle and the higher the trading frequency, the more deduction you’ll get for deducting actual costs...but the cheaper and older the vehicle, the more you’ll come out ahead on taking the cents per mile deduction.
The reason for this is that the cents per mile is a flat rate for all vehicles, no matter the cost of the vehicle. The components of the cents per mile deduction are;
- Gas and oil,
- Maintenance and repairs, and
Even if you’ve driven a car for 20 years, the IRS will still let you take the same cents per mile deduction as you would for a brand new Beemer. They will continue to reimburse you for the depreciation component of a car that would otherwise have depreciated out long ago. The IRS adjusts the mileage rate only to keep up with rising and falling gas prices.
You should also know that you can elect “cents per mile” in the first year you own the car and change to actual expenses in a later year. This can help you and your CPA plan strategically to get the most deductible expenses from your business driving. Note that you cannot change from actual expenses back to cents per mile.
What if you’re an employee and put business mileage on your vehicle? High-income professionals (HIPs) have an especially difficult time getting any deduction for business expenses because employees have two thresholds to overcome:
- You must itemize
- You must have enough business expenses (along with certain other expenses such as tax preparation and portfolio management fees) to exceed 2% of your adjusted gross income (AGI).
In other words, if your AGI is $500k, then you can deduct only those expenses that exceed 2% of that amount, or $10,000. Another way of looking at it is that you lose the first $10k of employee business expenses you pay for.
Here’s a workaround: it’s called an “Accountable Plan”. Under an accountable plan, you keep verification for out of pocket business expenses, including receipts, and submit them to your employer for reimbursement. An accountable plan would allow you to be reimbursed for CME, business mileage, licensing, dues, and so on.
The employer gets to deduct the costs and you don’t have to pay tax on the reimbursement – both sides are happy. If you are in job negotiations to be a W2 employee, negotiating to be reimbursed for costs related to your employment under an accountable plan can save you thousands of dollars each year.
By the way, if you’re deducting cents per mile, property taxes, parking and tolls, and car tags can be deducted separately as they are not included in the calculation.
What if you lease your car? You’ll still be able to deduct the proportionate amount of the lease for business expenses as you would if you owned your car.