This section of our information hub will focus on mileage reimbursement for those who are self-employed or business owners in the United States and how best to track and report mileage for tax deduction purposes. This section also applies to those are freelancers, independent contractors and rideshare drivers. For those who are employers or employees, there are additional sections within this information hub that provides helpful information under those circumstances.
Self-employed individuals may deduct expenses for mileage realized during the course of activity associated with their business. If your automobile is used exclusively for conducting business as someone who is self-employed, you may deduct all expenses associated with using that vehicle, including oil changes, maintenance, repairs, tire replacement and rotations, etc.
If you use your personal automobile for both business and personal activities, then only the expenses associated with conducting business can be tracked for deduction.
It’s important for self-employed individuals to understand several things as they consider tracking and reporting mileage expense. First, self-employed individuals should understand the details and specifics of tracking and reporting mileage expense. Taking advantage of all deductions available is the best course of action and can save on overall tax exposure. Second, the information contained within these information hubs are written as helpful guides but should not be viewed as resources from tax or accounting professionals. Self-employed individuals should always check the information contained within the IRS website regarding reimbursement of mileage expense. In addition, self-employed individuals should consider checking with a professional tax or accounting professional to ensure they understand all possible requirements for mileage reimbursement.
Two different ways to calculate mileage deductions
There are two different ways self-employed individuals can use to calculate mileage expense for the purposes of tax deduction.
Standard mileage rate
For self-employed individuals who choose this method, actual miles are driven and the IRS rate is used to calculate the actual expense. For example, as of January 2020, the standard mileage rate is 57.5 cents (or $0.575) per mile.
The other method self-employed individuals can use to claim deductions for expenses related to operating an automobile used to conduct business is the expense method. With this method, the self-employed individual can list expenses, including gas, repairs, insurance, maintenance, etc. the IRS has an updated list of what business owners and self-employed individuals are able to claim when using this method.
It’s possible that self-employed individuals or business owners qualify for both methods, so understanding which rules apply to each method is helpful. When using standard mileage rate, keeping track of actual trips and their length (in miles) is critical. For those using actual expenses, keeping track of all expenses (i.e. receipts of all repairs, insurance premiums, gas, etc.) is required.
What to do when you own or lease the vehicle
In order to qualify for the IRS standard mileage rate, self-employed individuals or business owners must either own or lease their vehicle(s) being used for the business. The criteria are a little different for ownership and leasing.
Own the vehicle
If the vehicle is owned, then the following requirements should be used:
- During the first year of operation in the business, the standard mileage rate must be used for reimbursement. For all following years, the self-employed individual or business owner may switch back and forth between the mileage rate method and the expenses method.
- There can be no claimed depreciation deductions on the car, except by the straight-line method.
- There can be no claim of a section 179 deduction or the vehicle’s special depreciation allowance. There is also updated information about a vehicle’s business use provided by the IRS that can be reviewed for more information.
Lease the vehicle
If the vehicle is leased, then the following requirements should be used:
- During the first year of operation in the business, the standard mileage rate must be used for reimbursement.
- In all subsequent years, the standard mileage rate method should be used during the entire period the vehicle is being leased. This covers periods of renewals and newly leased vehicles as well.
- Simultaneously using five vehicles or more for the business (i.e. fleet operations) is not allowable. Switching between each vehicle is allowed. This requirement should help self-employed or business owners be mindful of using more than four vehicles for business at any given time.
What kinds of vehicles qualify for mileage deduction?
When using vehicles for business, several types of vehicles qualify, including cars, vans, pickups, panel trucks, etc.
Tracking and keeping records of mileage
The IRS has a definition for keeping adequate records. For all transportation associated with the business, the IRS requires self-employed individuals or business owners to log the following:
- mileage for each business use
- total mileage for the year
- time, place (your destination), and purpose
Records should also be timely or recorded at or near the time of the incurred expense. Practices that are deemed acceptable by the IRS include trip diaries, logs and sheets, as well as account books or similar records.
If using a vehicle for both personal and business, records should show business vs. personal use of the vehicle as a percentage. That includes keeping a log of all trips and calculating the share used for the business.
To make it easier to track mileage for business expense, TripLog provides an easy to use smart phone app that allows self-employed individuals and business owners to remain on top of record keeping.
What is the current IRS mileage rate for self-employed?
The IRS has determined that self-employed individuals may deduct 57.5 cents per business mile when calculating mileage expense. In addition, the IRS sets rates for medical, moving and charitable mileage reimbursement. The rates for 2020 are as follows:
- $0.575 per mile for business
- $0.17 per mile for medical purposes
- $0.17 per mile for moving (used only for Armed Forces individuals on active duty)
- $0.14 per mile for service of charitable organizations
Calculating deduction and business usage
It’s important for individuals to be able to determine the percentage of their vehicle used for business and personal. The calculation is not too complex, but the following example should prove helpful:
- There are ten trips that have been taking during the course of a month, with each trip equaling 20 miles. Total personal miles within that month would come to 200 (10×20 = 200).
- Within the same month, there were three business trips taken that totaled 100 miles.
- When figuring out business use, you can divide business miles by the total number of miles driven. In this example, the vehicle has been used for business 33% of the time (100/300 = 0.33).
- Multiply the number of business miles with the mileage rate, 58¢.
- This example shows that the business mileage expense for this month would equal $57.50 in (100×0.575).
Transportation that qualifies for business deduction
There is no maximum for the number of miles that can be claimed for deduction. The important requirement is that the miles driven are done so for business purposes. With this in mind, there are additional items to keep in mind when considering mileage deductions for business.
What constitutes business mileage?
- Driving between two different places of work
- Driving to meet clients or conducting client work
- Driving associated with business activities
What does NOT constitute business mileage?
- Commuting to work from home
- Carrying tools or other business items during a commute
- Having advertising or company information displayed on your vehicle
For additional information regarding working from home and related guidelines, visit the IRS website.
In addition to tracking and reporting mileage expense, self-employed individuals and business owners should keep in mind that other expenses, such as parking fees, tolls and related costs incurred when conducting business qualify for deduction. These costs do not qualify for deduction if commuting to your place of work.