Actual Expense Method for Deducting Auto Expenses

Actual Expense MethodRideshare (Uber, Lyft, etc.) and other drivers actually have two options (see my mileage vs. actual expense method article) for deducting auto expenses attributed to driving passengers for hire. These methods include the standard mileage rate method (available starting in 2011), and the actual expense method. Your total deduction and recordkeeping requirements differ depending on which method you choose. Aside from some small exceptions, the IRS actually lets you switch between methods each year. This allows you to pick the most beneficial method year after year.

The actual expense method allows you to deduct the business portion of auto related expenses that you incurred during the year, based on the percent of business mileage driven. Some, but not all, of these expenses include: gas, oil, tires, lease payments, maintenance/repairs, insurance, registration fees/tags, and depreciation. For this method, you would need to keep your receipts/documentation for the applicable expenses. You would total these expenses and multiply these amounts by the business use percentage to determine the amount you can deduct.

There are certain auto related expenses that you get to deduct regardless of which method you choose. Examples of these include: parking fees, tolls, and personal property taxes. Again, you would need to keep accurate records of these expenses. Parking fees and tolls are deducted 100% if incurred during business use.

It requires more work and more recordkeeping, but you may end up with a larger deduction by using this method. One of the largest tax benefits is being able to take a depreciation deduction for your vehicle. This means you would be able to deduct a certain percentage of the price that you paid for your vehicle each year. Assuming you use your car 50% or less (determined by your mileage driven) for your rideshare business, you would be able to deduct the cost of your car equally over 5 years. The amount deducted is based on your business use, and it is also subject to annual limits set by the IRS for passenger autos. For cars placed in service in 2015, this limit is $3,160 for passenger autos and $3,460 for trucks/vans (found here on the IRS website).

To put the actual expense method into perspective, let’s take a look at an example: let’s say you drove your car during the year for a total of 10,000 miles, of which 2,000 miles were for business. In addition, you incurred the following expenses during the year:

Gas: $1,350

Oil changes: $150

Repairs, new tires, etc.: $400

Insurance: $1,000

Depreciation: $3,000 (this assumes you bought your car for $15,000, calculated before any limits)

Tolls: $50

Total expenses = $5,950 ($5,900 not including tolls, as tolls are not subject to the business use % limits)

Your business use percentage = 20% (2,000 miles / 10,000 miles)

Your allowable deduction under the actual expense method would be: $5,900 * 20% = $1,180 + tolls $50 = $1,230

Just remember, you must accurately track and document your mileage in order to get the most benefit from the actual expense method. You need to know the total miles you drove the car for the year, and you need to know your business mileage driven. Business mileage includes your mileage for getting to your fare destinations. Accurate records must be kept for the mileage driven and all expenses paid.

Hopefully you have a better understanding of the deductions available. If you haven’t already done so, check out my post on the mileage vs. actual expense method for deducting auto expenses.

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