Just before Christmas, the IRS has proved a bringer of gifts for taxpayers who drive a car for business.
The IRS announced the federal standard mileage rates for 2022. So, how many cents per mile can you write off this year?
The IRS business mileage rate has increased the standard mileage rate for business driving during 2022 to 58.5 cents per mile. This is a 2.5 cent increase over the rate for 2021. Driving costs have gone up, so the rate has increased. The IRS recalculates the standard mileage rate for business each year using an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas,¬†and oil. To determine your mileage deduction from the IRS using the standard rate, you simply multiply your business miles by the rate. For example, if you drive 10,000 business miles in 2021 you'll have a $5,850 deduction. In contrast, if you drove 10,000 business miles in 2021, you could only deduct $5,600. The standard IRS miles deduction for driving for charitable purposes is 14 cents per mile. The IRS is not allowed to adjust this amount.
Under IRS rules, you can only deduct a portion of your driving expenses for business and work travel. And there are two ways to do this: the standard mileage method and the actual expense method.
However, it isn't as easy as picking the method you want or is most convenient. Certain rules and qualifications might steer you from one method to the other.
The first method, standard mileage rate, calculates your IRS mileage deductible based on an amount set by the IRS each year. For example, the standard rate for 2021 was 56 cents per mile. This amount is meant to represent the expense of operating and driving your car.
To calculate your IRS miles deduction, you simply multiply the total business miles driven by the IRS rate. So, if you've driven 200 miles a month, your deductible using the standard rate method is $112.
The standard mileage method is a very simple way of calculating your IRS miles deduction since you only need to keep track of your mileage. Thus, it's very attractive for employers who don't want the added administration of tracking car expenses individually. However, this means you miss out on other costs of your car, which may or may not be more than what you'll get from the IRS rate.
The other way to calculate your deduction is with the actual expense method. Here, you claim all the expenses needed in running your car, including gas, repairs, maintenance, depreciation, and insurance.
This method is far more comprehensive and can accurately account for all the costs involved. However, it's also much more demanding, as you need to keep track of every single expense of your vehicle.
The other advantage of the actual expense method is that it's the "default" way of calculating mileage reimbursement deductions. You don't need to qualify for it.
On the other hand, you do need to qualify for the standard mileage rate. First, you need to either own or lease the car.
Second, you're required to use the method during the first year of ownership; afterward, you can freely switch to the actual expense method (the only exception is if you lease your car, in which case you need to stick with the standard mileage method throughout your leasing period).
This also means that you can't switch to the standard mileage method if you've used the actual expense method during your first year of ownership.
Third, you can't already claim depreciation deductions or apply for a special depreciation allowance on your car.
Lastly, using the standard mileage rate is also limited to a maximum of four vehicles running at any given time, regardless of whether you own or lease them.
Regardless of which mileage method you use, or if you don't plan to make these claims on your tax return at all, it's essential to track your miles. And you can do this effectively by keeping records.
For one, the IRS requires "timely" records of your total business mileage per year, which should include the following details:
· The date, purpose, and destination of each trip
· Total miles driven for the year
· Mileage for each business use
"Timely" here means that recording should be done immediately after or very close to the trip in question. This ensures that the data you log is more accurate.
Another important number to show is the percentage of your business trips versus personal trips per vehicle. You can do this by dividing business miles over your car's total mileage.
Let's say you've driven ten personal trips of 30 miles each and five business trips of 50 miles each. So your percentage of business trips, in this case, would be 45%, or roughly half.
Traditionally, the way of keeping records is through handwritten trip diaries or log sheets. However, people are more prone to forgetting these or misplacing logs entirely.
It's far easier and more efficient to use a mileage tracker app. The MileIQ app, for instance, automatically logs the miles driven in the background much more accurately. You can also easily classify each trip as business or personal with a simple swipe and see mileage costs in real-time.