Mileage vs Actual Expense Tracking

Maximizing tax write-offs as an independent contractor or self-employed individual often includes leveraging car-related expenses. There are two primary avenues for deduction: tracking mileage or itemizing actual car expenses based on work usage. Deciding between these approaches can significantly impact your tax savings.

Mileage Method: The Simplified Route

The IRS introduced the mileage deduction method to streamline car expense write-offs. With this approach, you only need to track work-related miles driven, bypassing the detailed record-keeping of maintenance, gas, and depreciation expenses. At tax time, a standard mileage rate deduction applies, set annually by the IRS (currently at $0.655 per mile for 2023).

Additionally, certain costs, such as parking fees, tolls, car washes, and registration fees, can supplement this deduction. While it eases the tracking burden, some expenses still require monitoring.

There are many apps that can help make tracking mileage very quick and easy. Our favorite is MileIQ!

Actual Expenses Method: Precision in Deductions

Alternatively, the actual expenses method involves summing up all incurred car costs throughout the year. This comprehensive approach allows deductions for gas, insurance, maintenance, oil changes, lease payments, and vehicle depreciation, factored by the percentage of car use for work.

Technological advancements, like expense-tracking apps, have simplified the once laborious task of recording actual vehicle expenses, making this method more accessible for self-employed individuals.

Determining the Best Approach for You

The optimal method hinges on your driving habits and variable expenses. For instance, a typical driver might benefit more from the actual expenses method due to precision, while a heavy driver could save significantly by meticulously tracking mileage.

Switching between methods carries its own considerations. Opting for the actual expenses method in the car’s first year of work ties you to that method indefinitely, whereas choosing the mileage method initially allows flexibility to switch between methods in subsequent years.

Understanding the Pros and Cons

Each method presents distinct advantages and drawbacks.

Mileage Method:

Pros:

• Flexibility to switch methods initially
• Larger deduction for heavy drivers

Cons:

• Smaller deduction for typical drivers
• Requirement to track mileage

Actual Expenses Method:

Pros:

• Bigger deduction for typical drivers
• Ability to deduct vehicle depreciation

Cons:

• Method lock-in for the car’s life if chosen initially
• Detailed summation of all car expenses

Ultimately, the choice between mileage tracking and itemizing actual expenses rests on your driving patterns and record-keeping preferences, both offering unique avenues to maximize tax benefits.