Contractors and business owners often do a great deal of driving for business purposes. Whether you’re meeting with potential clients, attending networking conventions, or visiting various worksites, it doesn’t take long to start racking up the miles—and, of course, those miles don’t come free. Luckily, business owners and contractors can deduct some of that cost from their tax returns each year. Keep reading to learn more about how to claim the business mileage deduction, as well as the new standard mileage rate for 2023.
Your Options for Claiming the Deduction
There are two methods for claiming the business mileage deduction on your tax return: use the standard mileage rate, or deduct your actual costs. Just as with taking the standard deduction versus itemizing your deductions for the year, the latter option takes a lot more work. What’s more, it’s impossible to say for certain which option is better for you; the answer can even vary from year to year based on your total vehicle expenses and mileage driven. The only way to know for certain which method of claiming your business mileage will provide the highest deduction is to perform both calculations and choose which you want to use. So, here are the instructions for both options.
Claiming the Standard Mileage Rate
The standard mileage rate changes every year based on inflation, just like the standard deduction on your personal tax return. For 2023, the new standard mileage rate is 65.5 cents per mile. This is a 3-cent increase on top of the mid-2022 increase the IRS offered, and is a much larger jump than is normal between tax years; this is due in large part to the rapid increase in gas prices last year.
To claim the standard mileage rate, you will need to carefully track your miles driven for business purposes. This means keeping a log of every trip you drive for your business. That log should include all of the following information for every trip you take for business purposes:
- Purpose of the trip
- Starting odometer
- Ending odometer
- Total miles for the trip
You can then total up all of the mileage driven for your business at the bottom of the log. That’ total would then be multiplied by 65.5 cents to determine your deduction. For example, let’s say you drove 20,000 miles for business purposes in 2023. Multiplying this by the standard mileage deduction would give you a total deduction of $13,100.
Keep in mind that, like last year, there is a chance that the standard mileage rate may change in the middle of the year. If this happens, you’ll need to multiply the mileage you drove before the change by 65.5 cents, and multiply any mileage driven after the change by the new standard rate, then add them together for your total deduction.
Claiming Your Actual Expenses
Your other option for deducting your miles driven is to track all of your driving-related expenses throughout the year, as well as the number of miles you drove for business purposes, as described above. Whatever percentage of your driving was done for business purposes would then be applied to your total driving-related expenses in order to determine your total deduction.
For example, let’s say you put 40,000 miles on your car last year, but 20,000 of those were for business purposes. This means half of your total miles—and therefore, half your vehicle maintenance and fuel costs—would be deductible. Your records indicate that you had a total of $22,000 in vehicle expenses last year, including fuel costs, oil changes, tire replacements, and other repairs and maintenance. This makes half of those expenses (or $11,000) tax deductible.
As you can see, this is lower than the example given above for the same number of business miles driven. However, this won’t always be the case. As we already stated, you will need to calculate both deduction options to determine which is best for you each year. In years when you have much higher vehicle maintenance costs, deducting actual expenses may provide a higher deduction than the standard mileage rate.
Get Help with Deducting Your Business Miles
Properly claiming your business deductions can make a big difference in the amount your company will owe come tax time. If you need help calculating your business mileage deduction from last year, or need guidance on properly tracking your miles and expenses this year, contact Peter Witts CPA today. We specialize in working with business owners and contractors, and handling complex tax situations with the utmost knowledge and experience.