Being able to write off business expenses like the use of your car is an advantageous tax incentive. However, calculating mileage isn’t as exciting as the notion of lowering your tax liability.
So, where do you start? First, you’ll need to determine the mileage rate that you’ll use to calculate your deduction. With a rate that changes every year, the most important step in this process is ensuring you’re using the right unit of measurement. You’ll also need to determine which mileage you can write off and what doesn’t qualify.
Use this guide to correctly calculate your mileage deduction for your tax return. We’ll cover the current rate and other key details to make the process as painless as possible.
- 2021 IRS mileage tax rates
- Types of mileage that qualify for the deduction
- Who can take advantage of deductions for mileage
- How to calculate the mileage deduction
- How to get the most out of your mileage reimbursement
- Claim the mileage deduction and maximize your small business tax savings
According the IRS, the 2021 standard mileage tax rates are:
- Business mileage rate: 56 cents per mile
- Medical/moving mileage rate: 16 cents per mile
- Charitable mileage rate: 14 cents per mile
How are IRS mileage rates determined? The IRS has an independent contractor conduct an annual study to evaluate the fixed and variable costs of operating a vehicle. This calculation is used for business, medical, and moving mileage rates. Charitable mileage rates are set by statute Sec. 170(i).
Optional standard mileage rates aren’t the only way to account for business use of your car. You can also use actual costs to claim a deduction.
It’s important to keep in mind that mileage rates can change each year. Below you can see that the 2021 IRS mileage rates have decreased. This indicates that the costs of operating a vehicle have gone down per the study the IRS bases these rates on.
Here are the IRS standard mileage rates for the past four years:
Note that mileage rates increased for the 2019 tax year but then began to decline again. According to SHRM, this change occurred in response to the Tax Cuts and Jobs Act (TCJA) of 2017 once it was implemented. Additionally, fuel prices have gone down since 2019, and driving costs have significantly decreased during the coronavirus pandemic. Depending on how these factors evolve, the mileage reimbursement rates will change in tandem. That’s why it’s a good idea to always check mileage rates before completing your income tax return each year.
Driving is an inevitable part of life, but you can make the most of the hours spent in your car with the mileage deduction. There are four types of mileage that you can write off for different purposes for use of a car:
Business miles are those that can be written off based on business use of your vehicle. This could be your personal car as well as fleet vehicles. Mileage related to business use of your vehicle can include:
- Traveling to job sites or other storefronts
- Driving to meetings
- Making deliveries
- Running business-related errands
- Attending conferences
Note that your daily commute to and from work is not deductible. The 2021 IRS mileage rate for business purposes is 56 cents per mile—the highest of the mileage rates.
These two categories are paired together with the same mileage rate of 16 cents per mile, but that’s where the similarities end.
Moving miles are meant to cover the driving expenses related to moving. However, this deduction only applies to members of the armed forces in the case that they have to relocate due to permanent change of station.
Medical miles include any driving you do for medical purposes. This may include driving yourself or family members to doctor’s appointments, ongoing treatments, and pharmacy pickups. In addition to treatments and doctor visits related to physical conditions, you can also include medical mileage for mental health care.
Note that you can also deduct expenses for parking and tolls related to medical care. There are a variety of other medical deductions you may also be able to itemize.
Miles can be written off for driving related to time spent participating in charity events or doing work on behalf of a charitable organization. For example, you can deduct mileage for your commute to and from the organization’s headquarters where you’re volunteering. Or, if you run your own nonprofit, you can deduct costs for any driving you do to conduct operations.
The 2021 IRS mileage rate for charitable purposes is 14 cents per mile. You may have noticed that the charitable mileage rate is significantly lower than the business standard mileage rate. For those who drive a significant amount in serving charitable organizations, it may not be sufficient to ease the burden of their true vehicle expenses. While it might not seem proportionate to actual expenses, anything that can help offset the cost is worth taking advantage of.
If you’ve been driving throughout the year for charitable purposes, you should track the mileage and claim this tax deduction. In addition to mileage, you may also be able to deduct expenses for parking and tolls.
Not everyone is eligible for mileage deductions for using their vehicle. There are several requirements that you must meet, including:
- You must own or lease the vehicle
- You cannot operate five or more vehicles at one—this applies to fleets
- You must use the straight-line depreciation method if you claimed a depreciation deduction for your vehicle
- You cannot claim a Section 179 deduction or special depreciation allowance on your vehicle
- You cannot have claimed actual expenses after 1997 for a leased vehicle
Unsure whether you meet these requirements? Speaking with a tax professional can help you determine if you qualify.
Depending on how you’ve been tracking your mileage, there may be several steps for manually calculating your mileage deduction. Let’s use business mileage for our example:
- Subtract miles driven for business from total miles driven during the calendar year.
- Look up the mileage rate for the tax year you’re filing for.
- Multiply miles driven by the applicable mileage rate.
Keep in mind that you must subtract any mileage that counts as personal use. Once you’ve calculated your mileage deduction, you’ll enter the information on Schedule C, Profit or Loss from Business. Schedule C will be submitted with your individual tax return.
Calculating your mileage deduction should be fairly straightforward, but many people miss out because they don’t keep detailed driving records. Using QuickBooks Online to calculate your mileage deduction and automate mileage tracking makes it easy.
With a million other things on your mind, it can be easy to forget to track mileage. While forgetting once isn’t going to impact your deduction significantly, letting it slip your mind regularly can add up. To maximize your mileage reimbursement, it’s important to get into the habit of tracking mileage on a daily basis.
You should also come up with a reliable system for tracking your mileage. It’s important that it’s detailed and organized, so you can easily refer to the data when it comes time to file your taxes. You don’t want to find yourself sorting through a disorganized pile of notes when it’s down to the wire.
For many small business owners and self-employed workers, tracking mileage is easier said than done. To make the process easier and help you take advantage of this deduction, here are some tips for making the most of mileage reimbursement:
- Have a clear understanding of how the different types of mileage are categorized
- Write down the odometer reading at the beginning and end of the day
- Maintain detailed records of miles and the category they fall into
- Save your records and receipts—you may need them in case you make a miscalculation or have to undergo an audit
- Use QuickBooks Online’s built-in mileage tracking feature—you can use GPS or add mileage manually
In addition to automating mileage tracking, QuickBooks Online can create easy-to-read mileage reports. This makes it effortless to calculate your mileage and maintain detailed records for tax purposes.
As a self-employed individual, you can significantly benefit from claiming all of the deductions your small business qualifies for when tax season comes around. Mileage can be a major deduction for your small business. Reducing your tax liability means more money to spend on critical business expenses and increasing funds dedicated to growth. With QuickBooks Online, taking advantage of the mileage deduction is easier than ever. If you already use QuickBooks Online for your accounting, start using the mileage tracking feature now to streamline the process, or sign up today.
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