When it comes to cars, self employed individuals and small business owners usually have the same two questions: how much of the initial purchase can I write off, and should I keep up with mileage or actual expenses? I will address the first question in a later article once Congress retroactively increases the depreciation limits for 2015. The second question is a little more straightforward but with a few special circumstances to consider.
Taxpayers that use a vehicle for business purposes and are not eligible to be reimbursed for their expenses can deduct either mileage or actual expenses on their tax return. This is especially handy for self employed individuals that spend quite a bit of time in the car, such as real estate agents or commercial salespeople. Often, taxpayers assume actual expenses will generate a higher deduction, but that is not always the case.
Consider this: taxpayer drives a Toyota Camry that has a 17 gallon gas tank and gets 25 miles per gallon on average. Assuming gas is $2/gallon, that means the taxpayer could drive 425 miles for $34. The mileage rate for 2015 is 57.5 cents per mile, which means that same 425 miles would generate a $245 deduction using the standard mileage rate. In this case, mileage is a much better method to use than actual expenses, and that will almost always be the case when the taxpayer has a fuel efficient vehicle in an environment of low gas prices.
There are a few precautions to take when deciding whether to use actual expenses or mileage on a vehicle. One is once the decision is made, it usually cannot be changed in the future i.e. a taxpayer cannot take actual expenses one year and mileage the next. Another is the historical trend that the IRS is usually 1-2 years behind in aligning the mileage rate with expected actual expenses. The mileage rate is designed to be one number that covers gas, maintenance, and depreciation on a per-mile basis. From 2014 to 2015 the standard mileage rate increased 1.5 cents, while average gas prices decreased. It can be expected then that the 2016 rate most likely will be less than 57.5 cents per mile due to the decrease in gas prices, but that will not necessarily be consistent with gas prices in 2016 (which could go up).
Mileage rates for 2016 are expected to be released close to the end of the year (December 2015). My guess is 55 cents per mile.