IRS Reduces Standard Business Mileage Rates

Small businesses are allowed several deductions to help reduce their overall tax liability. Some of the most popular include the home office, business travel, hotel, meals, and entertainment. Another popular deduction is for business use of a vehicle. There are two ways to take the business vehicle expense deduction; the Actual Expense Method or Standard Mileage. Small Business Accounting

Actual Expense Method: The Actual Expense Method involves calculating all qualified vehicle expenses. These may include:

  • Gas and Oil
  • Vehicle Maintenance and Repairs
  • Business-Related Parking Fees
  • Auto Insurance
  • Tires and Other Auto Parts
  • Auto Repair Tools
  • Vehicle Washing
  • Vehicle Towing
  • Vehicle Lease Payments
  • Depreciation

Calculating the qualified vehicle-related expenses can be quite complicated, and meticulous record keeping is required. Because of the complexities involved, many business taxpayers opt for the Standard Mileage method.

Standard Mileage: The Standard Mileage rate is very simple; you calculate the number of miles you drove for business during the year, and multiply it by the allowed mileage rate for the tax year in which you put on the miles. For example, for 2015, the Standard Mileage rate is 57.5 cents per mile. So if you put on 25,000 business miles during the year, you would multiply 25,000 by .575 and your mileage deduction for the year would be $14,375. To use this method, all you need is a mileage log and the diligence to record your start and end miles for each business-related trip. No need to keep receipts for numerous vehicle-related expenses.

New Calculations for 2016: In recent years, the Standard Mileage rate has typically increased to keep up with the rising cost of gasoline. However, the price of oil declined sharply in 2015, cutting the cost of gasoline nearly in half. As of this writing, oil prices are under $35 per barrel, lower than they have been in over a decade, and most areas of the country are paying less than $2 per gallon for gasoline. To reflect this decline, the IRS has lowered the Standard Mileage rate for business miles in 2016 from 57.5 cents per mile down to 54 cents per mile, a 3.5-cent drop. So if we take the previous example of 25,000 business miles, your deduction for 2016 would be reduced from $14,375 to $13,500.

The 3.5 cent reduction in the Standard Mileage rate may be entirely fair based on the current cost of gasoline, but it may also be worthwhile to consider whether or not you would be better off using the Actual Expense method. Though the cost of gas is down, the other expenses on that list are not likely to vary as much, so it might be to your benefit to switch calculation methods. Speak with your tax professional to help decide what is best for your business, and if you decide to switch, be sure to start tracking business vehicle expenses right away, so you can maximize your deduction next year.

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