I prepare hundreds of Realtor tax returns every tax season. Historically, over 70% of them take the Standard IRS Mileage Rate because it’s the quick and easy way to claim auto expense.
But is it the best way?
Standard Mileage Rate Method
Let’s say you claim 10,000 business miles this year. (You probably drive more. In fact AAA statistics prove you drive more, but 10,000 is an easy number to work with for illustration purposes.)
Take the 2020 IRS standard mileage rate of 57.5 cents per mile, times 10,000 business miles, and even your second-grader can easily calculate the $5,750 tax deduction.
That’s great for the average taxpayer-- but what if the operating costs for the vehicle you drive aren't “?
Example: what if you drive a pickup truck, or an SUV, or (dare I ask) a minivan? You are losing money every time you put the key in the ignition if you take the IRS mileage rate!
Every year the American Auto Association (AAA) does an operating cost survey. This AAA survey says it costs you 72 cents per mile to operate an SUV. So if you drive your SUV 10,000 business miles, and claim the Standard Mileage Rate, then you’re losing a $1,450 tax deduction every year. (72 cents operating costs MINUS 57.5 cents per mile IRS 2020 mileage rate TIMES 10,000 miles = $1,450.)
Actual Expense Method
So what do you do, exactly, to claim actual expenses rather than take the standard mileage rate?
First, to maximize your auto deduction, keep track of all your actual expenses:
- DMV Registration
Then you take that dollar total and multiply it by your business use percentage. In other words, if you drove 12,500 miles total, including 10,000 miles for business use, then deduct 80% of the total dollar amount on your return because 80% is your business use percentage.
Hey, keeping tabs on your expenses really isn't that ; you pay for all this stuff electronically these days. So there’s a record of it, somewhere! Pull your bank or credit card statements to get the dollar totals.
Here's where it gets really good
Now, add one other number to all those out-of-pocket costs. This is where it gets really good -- something we call
Depreciation is just a 25-cent word that tax geeks use to account for the wear and tear on your vehicle each year.
Did you know the average new car purchase price in 2019 was $37,185?
Assuming you're average for a moment... take that average price, divide that amount by 5 years (because that’s how long IRS rules say you can write off or ‘depreciate’ a vehicle), and you arrive at a $7,400 auto deduction every year - just for depreciation!
Note: I took 5 years as a “straight line” depreciation calculation; you can actually use an "accelerated" depreciation formula to get a bigger deduction in the early years. So $7,400 is actually a conservative deduction total. But I digress…
Add that $7,400 to your out-of-pocket costs for gas ($2,000?) oil ($100?) tires ($400?) repairs ($250-$2,500?) insurance ($1,200) and DMV registration ($75?) and you can see that claiming actual auto expense will give you a bigger tax deduction than the typical $5,750 auto deduction Realtors take using the IRS standard mileage rate.
If your vehicle is an older model, or you paid less than $25,000 for it, the numbers don't work as much in your favor, so you'd probably find the mileage rate more advantageous in your situation.
Maybe you’ve hesitated to deduct actual vehicle expenses because you know your record-keeping has holes in it.
But if your record-keeping has holes in it, that's not in itself a good enough reason to opt out of claiming actual expenses, and take the mileage rate instead.
The fact is, you need to keep a good mileage log regardless of whether you take the mileage rate or deduct actual expenses.
If you use the mileage rate, you need a good mileage log. If you use the actual expense method, you need a good mileage log. (Think about it... how else are you going to determine your 'business use percentage'?)
Auto expense is what an IRS auditor will focus on first if your tax return raises an audit flag. And the first thing the auditor will ask you for is a mileage log.
Download one of those mileage apps like MileIQ to your phone; it'll save you lots of time and money later.
Anchor on this
Don't assume that using the standard IRS mileage rate gives you the biggest auto deduction. The actual expense method can generate bigger savings in many cases. But either way, be sure you’ve got a mileage log to document everything. By ‘everything’, I mean do not forget to track the date, odometer readings, destination, person you met with, and the business purpose of each trip on your log.
If you need help with your 2020 tax prep, or have questions about how to file so that you can avoid IRS trouble down the road, contact me at 757-312-0098 or firstname.lastname@example.org
Jim Flauaus, EA