Deducting Mileage vs. Gas Receipts for Business Expenses

One type of deduction that many small businesses claim is for car expenses. There are two allowable methods for calculating the annual deduction. If you’re self-employed as a sole proprietor, independent contractor or partner, you have a choice between calculating the deduction using the standard mileage rate or with actual car expenses, which requires keeping receipts for gas and other car-related payments. Corporations, however, generally use the actual expenses to calculate the deduction.

Standard Mileage Rate

The Internal Revenue Service provides taxpayers with a fixed amount that can be deducted for each mile driven for business purposes. The fixed rate is subject to change each tax year, but not the underlying calculation. For example, if you drive your car 2,000 miles for business purposes during a year when the applicable mileage rate is 55 cents – your deduction is equal to $1,100. When you choose the standard mileage rate, you won’t be able to increase your car expense deduction for specific costs like gas and oil, with the only exceptions being for business-related tolls and parking charges.

Mileage Rate Restrictions

In order to take advantage of the standard mileage rate for a car that you own, you must use the standard mileage rate in the first tax year that you take any deduction related to that specific car – though you can always switch to the actual expense method on subsequent returns. If you use a leased car, the mileage rate must be used for the entire duration of the lease.

Actual Car Expenses

Using actual car expenses to calculate the deduction is an option, regardless of the legal structure of the business. Corporations that own or lease vehicles in the corporate name can deduct all expenses that relate to its cars, provided the vehicles are only used for business purposes. Actual car expenses cover gas, oil, depreciation or lease payments, tolls, parking charges, insurance, repairs, tires and registration fees. For all other types of business owners who use the same car for both personal and business use, finalizing the amount of your deduction requires allocating the annual car expenses between deductible business use and nondeductible personal use, which can be done using the ratio of total miles driven for business to the total mileage you put on the vehicle during the year.

Keeping Receipts & Documentation

The IRS typically requires that you keep documentation of all actual car expenses, such as receipts for gas and oil purchases, canceled checks or bank statements for lease and loan payments and essentially for any expense you include in your car expense deduction. Note, however, that the IRS doesn’t require you to attach these documents to your business return. Instead, you just need to have them available in case your return is audited and you have to substantiate each expense.