Tax Credit on Car Expenses: Standard Mileage Rate vs. Actual Expenses

Tax Credit on Car Expenses: Standard Mileage Rate vs. Actual Expenses

Many people are still confused on what amount to deduct from their tax for expenses incurred on a personal vehicle’s repairs. They are given two options: deducting the actual expenses incurred, or deducting the amount computed by using the standard mileage rate. Which one is better? Which will benefit the taxpayer more?

In order to answer these questions, it would be best to get a clearer understanding of the two methods.

Using Actual Expenses

This is straightforward enough: deduct the amount actually spent or incurred on the operation, repairs and maintenance of a car or vehicle.

There must be a clear indication on which part of the amount was used for personal purposes and which part was for business use.

To come up with the final amount, the following are included in the computation:

  • Expenses on gas, oil and lubricants
  • Toll fees paid
  • Lease payments made
  • License fees
  • Insurance premiums paid
  • Rental and other fees directly related to the car, such as garage rental and parking fees
  • Cost of repairs (includes cost of spare parts and labor)
  • Cost of tires
  • Depreciation

Using the Standard Mileage Rate

Individuals will use a standard mileage rate set by the tax authorities. For tax year 2014, the rate was $0.56 for every mile. Only the miles used for business will be allowed as tax credit. This means that, in this method, the individual must keep track of the miles driven by the car, especially the miles driven for business.

The following are exclusions in this method; meaning, they cannot be claimed as deductions if the individual chooses to use the standard mileage rate, since they are already considered to be part of the rate set forth by the IRS.

  • Fees incurred on registration of vehicle
  • Insurance premiums on the vehicle
  • Fuel and maintenance expenses, including repairs
  • Lease payments on the vehicle, if any

A Comparison

In both cases, there is a need to divide the expenses between personal and business expense. An individual can only claim expenses on cars, including for auto repairs, if they have been used for business purposes.

Compared to the actual expenses method, choosing the standard mileage rate comes with several limitations or restrictions. For example, once it was chosen and clearly stated on the individual’s tax return, it is irrevocable, at least until the following tax year. Any amendments of the return within the year will also have to follow this method, even if the individual wants to switch to using the actual expenses.

Experts recommend that owners of new vehicles go for the standard mileage rate method during the first year that they use their car for business purposes. In the succeeding years, it would be up to the individual whether he wants to switch to using the actual expenses, or stick to the standard mileage rate.

Clearly, the simpler option would be using the actual expenses, provided you have documentation (e.g. receipts, toll tickets) to back it up. It also has the advantage of letting the taxpayer have his expenses for car repairs as a deduction. This method is also more advantageous for those who drive only a few business miles.

When trying to decide which of the two would be better, try performing mock-computations. The one that gives you a greater amount of deduction is surely the better option.