The Actual Expense Method Under the New Tax Law

Updated February 28, 2019  

When you use your car for business there are two ways to calculate your deduction: using the standard mileage rate or the actual expense method. The standard mileage rate method has remained the same and your miles are worth more in 2019. But, let's go over how the actual expense method has changed.

Standard mileage rate vs. actual expense method

Most people use the standard mileage rate because it's easier and simpler. All you do is keep track of your business mileage and deduct a set amount for each business mile.  

The actual expense method is more complicated and time consuming. In addition to tracking your mileage, you must also keep track of what you spend on gas and other car expenses.  

You then get to deduct your business use percentage of your actual car expenses. In addition, you may deduct an amount each year for depreciation.  

The Tax Cuts and Jobs Act which took effect January 1, 2018. It greatly increased the amount you may deduct for passenger automobile depreciation each year.

How does depreciation work for vehicles?

Depreciation works differently for vehicles than for other types of property. The annual depreciation deduction for automobiles is limited to a maximum dollar amount each year no matter how much the vehicle cost. The annual limit applies to all vehicles that qualify as "passenger automobiles."  

A passenger automobile is any four-wheeled vehicle made primarily for use on public streets and highways that has an unloaded gross weight of 6,000 pounds or less. Vehicles heavier than 6,000 pounds fall under Section 179 deduction rules.

Has the new tax law increased the amount of depreciation?

The new tax law has vastly increased the amount of depreciation that may be claimed each year for passenger automobiles for 2018 and later. If you qualify for bonus depreciation, you can deduct up to a whopping $18,000 the first year. Of course, this assumes 100 percent business use of the vehicle.  Bonus depreciation may be claimed only if you use a vehicle over 50 percent of the time for business. And you must continue to do so for the first six years you own the vehicle or be required to give back part of your deduction.  You must use an automobile 100 percent for business to qualify for the full deduction listed in the above chart. The limits are reduced by the percentage of personal use. For example, if you use the vehicle 40 percent of the time for personal use, your annual deduction limits are reduced by 40 percent.  These are by far the highest depreciation limits we've ever had for passenger automobiles. Yet, your actual depreciation deduction, up to the annual limit, depends on the cost of your car and your depreciation method.

How to depreciate your business vehicle

There are two basic methods to depreciate a vehicle: the straight-line method and the accelerated depreciation method.  You must use your vehicle for business more than 50 percent of the time to use accelerated depreciation. Your deduction is subject to the annual limits set forth above no matter the method used. The following table shows how much of the basis of an automobile may be depreciated each year using the different depreciation methods.

A depreciation example

Let's say you buy a new car for $50,000 in 2018 and use it 75 percent for business driving during the year. Here's how to determine your deduction:

• Your depreciable basis is $37,500 ($50,000 cost x 75 percent business use = $37,500 basis)
• Using accelerated depreciation, your depreciation deduction for 2018 would be 20 percent x $37,500 = $7,500
• You also qualify for 75 percent of the maximum $8,000 bonus depreciation deduction, which is $6,000
• Your total deduction for 2018 is $13,500

In 2019, your deduction will be .32 x $37,500 = $12,000, well under the $16,000 limit for the year.  In two years, you've deducted $25,500. You also get to deduct 75 percent of your actual costs of driving your car each year, including gas and repairs.

Other things to know about the actual expense method

Keep in mind that once you use the actual expense method, you're stuck using that method for as long as you own the vehicle. It's basically impossible to switch to the standard mileage rate after you've used the actual expense method.  Also, if you want to use the actual expense method, you must do so the first year you use a vehicle for business. Yet, it may be worth it based on the size of your deduction.

Tracking mileage for the actual expense method

If you use the actual expense method, you can still benefit from a mileage tracker app like MileIQ. If you ever face an audit, you'll need documentation of your business use of your personal vehicle. Keeping proper mileage logs is the best way to keep yourself covered.