The vast majority of self-employed people are sole proprietors—owners of one-person businesses. In 2012, 23,553,900 sole proprietors filed tax returns. What would you say was the single biggest tax deduction for such sole proprietors? That’s right, it’s the business mileage deduction. In 2012, the latest year stats are available, sole proprietors claimed over $86 billion in car and truck expenses, amounting to 14.2 percent of all claimed business expenses by sole proprietors. This was more than any other type of deduction they claimed.
For example, only about $34 billion was deducted by all sole proprietors for rent, and $42 billion for contract labor. If you’ve ever wondered why the IRS seems to pay so much attention to car and truck deductions, that’s why—it’s where the money is. The per mile rate the IRS allows to be deducted under the standard mileage rate might not seem like a lot, but it really adds up.
While we’ve covered mileage deduction extensively in the past, it never hurts to go over the basics. Remember, you can never deduct your commuting drives—the miles you spend getting from your home to the office. One workaround the commuting rule is to establish a home office. Not only can you take the home office deduction, you can also deduct business drives from your home office.
There are two options for deducting your car expenses: you can use the standard mileage rate or you can use the actual expense method. The standard mileage rate is used by the majority of those filing for business mileage deductions because it’s relatively easier to figure out. To get to this deduction, one would simply multiply the total number of business miles by the standard mileage rate and arrive at a figure.
The actual expense method requires more record keeping but can sometimes result in a larger deduction. To use this method, a taxpayer would have to keep diligent track of costs incurred for the car during the year including gas and oil, repairs and maintenance, depreciation, license fees, parking fees and more.