What method should you use to deduct business vehicle expenses? 

Do you use your personal vehicle — say, a passenger car, van or pickup truck — for business driving? If you do, you can generally deduct expenses attributable to the use of the vehicle, just like one that’s owned by the business. But there may be numerous twists and turns along the way.

Significantly, you can deduct only the portion of your overall expenses that’s attributable to your business use. Strict record keeping is important. There are two ways to arrive at a deduction for the current year — the actual expense method or the standard mileage rate.

Using the actual expense method

As its name implies, the actual expense method allows you to deduct actual expenses attributable to business use of the vehicle, including gas, oil, tires, insurance, repairs, licenses and registration fees. Also, you may claim a sizeable depreciation deduction for the vehicle, based on the percentage of business use. For instance, if you use a passenger car 80% for business purposes, you’re entitled to a depreciation deduction of 80% of the allowable amount.

However, be aware that annual depreciation deductions are limited by special “luxury car” rules (though recent legislation authorized 100% first-year bonus depreciation in addition to other allowable depreciation). For 2022, an $8,000 bonus depreciation can be tacked onto regular depreciation, for a maximum total of $19,200 based on 100% business use.

Notably, if you use the actual expense method, you must account for every single expense as well as maintain detailed records for every business trip. This includes a contemporaneous log listing mileage for each business trip, the date of the trip, the destination, the names and relationships of the business parties involved, and the business purpose of the travel. That’s a lot of record keeping!

Using the standard mileage rate

Alternatively, you can use the standard mileage rate approved by the IRS. This figure is updated on an annual basis. Initially, the IRS set the rate for 2022 at 58.5 cents per business mile traveled (plus business-related tolls and parking fees). But then, due to rising gas prices, it raised the rate to 62.5 cents per business mile for the last six months of the year. (As of this writing, the rate for 2023 hadn’t been announced yet.)

If you use this method, you don’t have to account for all your actual expenses, but you still must keep records of the mileage for each business trip, the date, the destinations, the names and relationships of the business parties, and the business purpose of the travel. 

Finally, the standard mileage rate isn’t available if you:

• Use five or more cars at a time (for example, fleet operations),
• Claimed an accelerated depreciation deduction for the vehicle in the past,
• Claimed a Section 179 deduction for the vehicle in the past, 
• Claimed actual expenses after 1997 for a vehicle that’s leased, or
• Are a rural mail carrier who has received a qualified reimbursement.

The actual expense method will often produce a bigger deduction, especially if you drive relatively few business miles during the year, because you benefit from the depreciation allowance based on business use. But you must keep all the records needed support your claims. (See “A dollar-and-sense example” below.) 

End of the road

Admittedly, it’s a hassle to keep all the extra records required to claim deductions under the actual expense method, but it may be worthwhile. Conversely, you may prefer the convenience of the standard mileage rate. We can provide the guidance you need.

A dollar-and-sense example

Various factors come into play when you compare the actual expense method with the standard mileage rate method for a new vehicle, but this simplified example will give you a good idea of how things may work out.

Suppose you typically drive 1,000 business miles per month in your personal car, or 12,000 miles for the entire year. Factoring in the cost of the vehicle and your percentage of business use, let’s say that your total depreciation allowance for 2022 is $17,000. 

Based on a conservative estimate, you figure out the cost of driving the car, including all the expenses stated above, is 50 cents a mile. In addition, you incur $500 in business-related parking fees and tolls during the year. 

Here’s how it breaks down in 2022 under each method.

1. The actual expense method. Using this method, you can deduct $6,500 for business mileage and parking fees (12,000 miles x 50 cents per mile + $500), plus $17,000 in depreciation, for a total of $23,500.
2. Standard mileage rate. With this rate, your deduction is limited to $7,760, calculated as $3,510 (58.5 cents x 6,000 miles) plus $3,750 (62.5 cents x 6,000 miles) plus $500.

In other words, you come out a whopping $12,740 ahead if you use the actual expense method ($20,500 - $7,760). Of course, the figures for your situation will vary, but the numbers generally favor the actual expense method.



Note that you can usually switch from using the standard mileage rate in previous years to the actual expense method in the current year, but not the other way around. So, you may start using the actual expense method on your 2022 return if you can support your claims.