Cents-per-Mile (CPM) vs Actual Expenses Methods

Eligibility Criteria for CPM and Actual Expense Methods

Any business can use the actual expenses method, but that’s not the case for cents-per-mile (CPM).

You cannot use CPM to calculate mileage deductions or reimbursements if:

• You or your employees use five or more vehicles for business at the same time
• You claimed a depreciation deduction for a vehicle using any method other than straight-line
• You claimed a special depreciation allowance on the vehicle
• You claimed a Section 179 deduction on the vehicle
• You previously used the actual expense method for the vehicle

If you choose the actual expenses in the first year of claiming deductions, you will have to continue using this method (but you can switch to the actual expenses method if you used CPM).

It’s an important caveat to keep in mind, since the actual expenses method not only requires more recordkeeping but can also lead to lesser tax deductions, especially for drivers with very high mileage.

What is Cents-per-Mile (CPM)?

The cents-per-mile (CPM) method involves calculating mileage deductions based on a set rate. Specifically, the standard mileage rate set by the IRS. You need to use the standard mileage rate when calculating CPM deductions for taxes and tax-free reimbursements for employees. If you reimburse employees at a higher rate than the standard rate, the difference will be considered taxable income.

This rate is updated annually based on a study of the ever-changing vehicle operating costs and economic factors, such as:

• Fuel prices
• Inflation
• Vehicle depreciation
• Costs of vehicle maintenance
• Cost of insurance

Expenses such as parking fees and tolls incurred during business trips aren’t included in CPM calculations. They should be accounted for separately as business travel expenses. 

That being said, the standard mileage rate does aim to make tax deductions and reimbursements as accurate as possible and using the CPM method lets you reimburse drivers and claim deductions directly for miles driven. In 2024, the IRS set the standard mileage rate at $0.67 cents per mile. 

The process of claiming deductions using the CPM is relatively straightforward compared to the actual expenses method. It takes three steps:

1. Thorough mileage tracking throughout the year. This part can be done very efficiently using an automatic mileage tracking app like MileIQ.
2. Calculating the deduction by multiplying business miles driven and standard rate. If you use an app, this part will be done automatically.
3. Reporting the deduction on your tax return. 

It’s also worth remembering that after you’ve claimed your tax deduction for mileage, you should hold on to your records for at least three years. In the case of an IRS audit, those documents may be needed.

What are the benefits of CPM?

Perhaps the biggest advantage of CPM is its simplicity. The only downside that used to make it slightly burdensome was the need to track mileage. However, mileage tracking apps made this process much easier — mileage tracking with MileIQ is almost fully automated.

But even without the help of an app, using standard mileage is still much more convenient than the actual expense method. It’s easy to calculate, and the drivers are only required to record key information about business trips. There’s no need to track every expense or keep every receipt — just a well-maintained mileage log is sufficient.

Lastly, using the standard mileage rate provides a guaranteed deduction. You qualify for the tax deduction without scrutiny as long as you have the mileage log and your vehicle is used for business purposes. This can provide peace of mind for business owners who prefer certainty over potential audit risks. Similarly, if your CPM reimbursement for employees is at or below the standard rate, they get to keep the full amount tax-free.

What are disadvantages of CPM?

The simplicity of CMP also comes with downsides. A primary concern is that it may underestimate costs. The rate might not fully cover actual expenses, especially for high-maintenance vehicles or fuel-efficient ones used in areas with expensive gas.

Additionally, CPM might not be the most economical option if business miles driven are minimal. In such cases, you might end up with a smaller deduction compared to what you might have claimed under the actual expenses method.

Lastly, if you choose to claim deductions using the standard mileage rate while leasing a vehicle, you must continue to use it for the entire lease period. This means you’re locked into the method for a significant period, regardless of changes in your driving habits or vehicle expenses.

What is the actual expenses method?

The actual expenses method entails tracking and documenting all business-related car expenditures, including:

• gas
• maintenance expenses
• tires
• repairs
• insurance
• depreciation

At the end of the year, you deduct a percentage of these costs based on the percentage of miles driven for business. The formula for calculating the deduction looks like this:

all vehicle expenses * business use percentage = deduction

Here’s how it works:

Let’s say that your total vehicle expenses for the year are $12,000, and out of 20,000 miles you’ve driven over the year, 10,000 miles were for business purposes (which results in 50% business use). Using the formula above, the calculation would result in a $6,000 deduction.

$12,000 * 50% = $6,000

Remember, meticulous record-keeping is a must with this method. To include any expense in your calculations, you need to have receipts or other documentation that proves the purchase or service. The IRS could deny deductions without proper documentation, so it’s crucial to have everything in order.

For depreciation, you can use the Modified Accelerated Cost Recovery System (MACRS). Deduction limits for passenger vehicles start at $12,200 in the first year, with an $8,000 bonus depreciation if the vehicle is used predominantly for business.

Benefits of actual expense method

The method is a bit more complicated than standard mileage, but it comes with significant advantages:

• You can deduct all legitimate business-related car expenses.
• You might end up with a larger deduction compared to the standard mileage rate, especially if your vehicle has high operating costs.

The actual expense method is also advantageous for high-maintenance vehicles or those with significant fuel costs.

Lastly, using the actual expense method provides greater control over expenses. It encourages mindful driving habits and cost-saving measures as you become more aware of every dollar spent on your vehicle.

Disadvantages of actual expenses method

Businesses and self-employed contractors that choose the actual expenses method have to be aware of the administrative burden of keeping track of every invoice and receipt related to a vehicle.. In addition to tracking mileage, you need to collect all relevant receipts throughout the year to get an accurate deduction. Then, you must calculate all the expenses, including the depreciation rate. 

If you’re not organized or don’t have the time to maintain detailed records, this method might not be suitable.

There’s also a potential for errors. Inaccurate record keeping could lead to denied deductions or penalties. 

Who can use each method?

You can generally use both methods if you’re self-employed or a small business owner. 

However, if you choose CPM, you must do so in the first year the vehicle is used for business. You’re allowed to switch to the actual expenses method in subsequent years. There are also a few regulations that eliminate the possibility of getting multiple deductions from different sources and a limitation on the number of vehicles for CPM (4 cars).

The actual expense method is required for businesses that use more than four vehicles simultaneously. However, businesses with multiple vehicles not used at the same time may still opt for CPM.

When it comes to reporting these deductions, self-employed individuals report their vehicle expenses on Schedule C (Form 1040), while farmers use Schedule F (Form 1040).

CPM vs. actual expenses method — which to choose?

While choosing the best option for you, you should mainly consider the following factors:

• Eligibility (businesses that operate large fleets may not be eligible for CPM) 
• Your driving habits
• Your vehicle type
• Your maintenance costs
• Your record-keeping abilities

If you drive a lot for business, have a vehicle with low operating costs, and prefer simplicity, CPM might be the best option. On the other hand, if your vehicle has high maintenance costs, you drive it primarily for business, and you’re organized and diligent, the actual expenses method might result in a larger deduction.

Ultimately, it’s about choosing the method that maximizes your tax savings and fits your business needs and personal preferences. Consulting with a tax professional can provide personalized advice tailored to your situation.

Both CPM and the actual expense method offer their own sets of benefits and drawbacks. Regardless of your choice, your mileage tracking, recordkeeping, and reporting can be much more convenient with an automated mileage tracking app, since both methods require keeping a mileage logbook.