The standard mileage rate for 2016 went down substantially from the previous year (54 cents per mile vs. 57.5 cents in 2015), so many of you may be thinking about using the actual expense method for your business mileage deduction. You can switch from the standard mileage rate to the actual expenses method but there are a few things to be aware of.
As you might be aware, you can take the mileage deduction using the standard mileage rate by multiplying your business miles times the rate. For example, if you drive 10,000 business miles in 2016, your deduction would be $5,400 (10,000 x 54 cents per mile).
With the actual expense method, you keep track of all your car expenses during the year, including gas, repairs, and a depreciation deduction as well for business driving (subject to an annual cap). You then deduct your business use percentage of the total.
The actual expense rate is not as popular as the standard mileage rate because it requires more record keeping, but it can lead to a larger deduction, especially for cars that are more expensive than average to operate.
The good news is that use of the standard mileage rate is optional. Drivers may always base their mileage deduction on the actual expenses they incur during the year while engaging in tax deductible driving. Thus, if you use the standard mileage rate last for 2015, you may use the actual expense method for 2016.
However, if you switch to the actual expense method after using the standard mileage rate, you'll have to reduce the tax basis of your car by a portion of the standard mileage rate deductions you already received. This will reduce your depreciation deduction. When you do your 2016 taxes, you can calculate your deduction both ways and use the method that gives the largest deduction.
While you can always use the actual expense method, there are restrictions on switching from that method to the standard mileage rate. To use the standard mileage rate at all, you must use the first year you drive your car for business.
If you use the standard mileage rate the first year, you can switch to the actual expense method a later year, provided that you used the straight-line method of depreciation during the years you used the actual expense method. This depreciation method gives you equal depreciation deductions every year, rather than the larger deductions you get in the early years using accelerated depreciation methods.
Remember, you can't switch back to the standard mileage rate after using the actual expense method if you took an accelerated depreciation, a Section 179 deduction, or bonus depreciation on the car.