Mileage Deduction: IRS Standard Mileage Rates

Big businesses typically have the luxury of hiring full-time drivers to distribute their products and handle all of the business’ transportation needs. The same can not typically be said of small businesses.

More often than not, small business owners – especially those who are just getting started – have to rely entirely on their own means of transportation. It’s crucial, in other words, for most small business owners to own their own car.

This is true even during the ongoing COVID-19 pandemic, a crisis that has forced countless business owners and self-employed individuals to either start working from home or temporarily close up shop. Even during the era of lockdown and social distancing, most small business owners need a car in order to be able to run a number of business-related errands.

Now, as anyone who has ever owned a car will be able to attest, it can get quite expensive to be a personal vehicle owner. In addition to fuel costs, car owners have to pay considerable amounts each year for tolls, repairs, auto insurance, and other expenses.

In fact, one recent study found that the cumulative annual costs of owning a car in the United States could be as high as $8,469. That can be a cripplingly high sum for the owner of a fledgling company trying to minimize their spending and get their small business off the ground.

Luckily, this year’s standard mileage rates – issued by the Internal Revenue Service (IRS) – make it easier for self-employed professionals to cut back on their business-related transportation costs.

This article will highlight everything that you need to know about the 2020 IRS standard mileage rates and how they may affect you.

The IRS Standard Mileage Rates for 2020

Each year, the IRS updates its standard mileage rates, which determine the limits that any given individual in the U.S. can deduct from their taxes for travel-related costs.

In the past, most employees could count on deducting all business-related travel costs from their annual tax returns. For example, a businesswoman in Kansas City whose boss sent her to a board meeting in New York City could generally expect that all of the business-related expenses incurred during her trip would either be covered by her employer or deducted from her taxes.

In 2017, that all changed with the passing of the Tax Cuts and Jobs Act. Among other things, the act ended the practice of allowing itemized deductions for mileage expenses that are not subject to reimbursement by an employer. (Incidentally, the tax act also added new restrictions to mileage deductions for moving-related expenses. The only individuals who can now claim a deduction for moving expenses are active military personnel who are changing the location of their posting.)

This year, self-employed individuals were granted access to the highest deductions – a rate of 57.5%. Here is the breakdown from the Internal Revenue Service’s website of the 2020 standard mileage rates:

“Beginning on January 1, 2020, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 57.5 cents per mile driven for business use, down one half of a cent from the rate for 2019,

• 17 cents per mile driven for medical or moving purposes, down three cents from the rate for 2019, and

• 14 cents per mile driven in service of charitable organizations.”

How to Calculate Your 2020 Mileage Deductions

Calculating the specific amount of travel-related business costs that you’ll be allowed to deduct from your taxes can be a tricky undertaking. This is especially true if you’re a small business owner who is simultaneously trying to navigate the other various legal and financial hurdles that come with owning your own business.

However, the good news is that there are a couple of well-established and straightforward ways to calculate your mileage deductions at the end of the fiscal year. These are known as (1) the standard mileage method and (2) the actual expenses method.

• The Standard Mileage Method. The standard mileage method is typically regarded as the simpler of the two methods for calculating one’s annual mileage deductions. This is primarily because it will only require you to keep track of the number of miles you traveled for business-related expenses (rather than requiring you to keep track of all vehicle-related expenses, such as registration fees, gas, repairs, insurance payments, etc.).

  With the standard mileage method, you’ll simply need to open the camera on your phone and snap a quick picture of your business vehicle’s odometer on January 1 of the new year to be able to back up the claims that you make on your tax forms.

  But before you file, there’s one more important step. Namely, you’ll need to calculate (and be able to prove) the percentage of those miles that you traveled for business-related matters. This could include picking up supplies, commuting to visit a client, or driving across town to attend a shareholder’s meeting, to name a few.

  Once you have roughly determined the number of annual miles traveled for business-related purposes, the final step will be to multiply that number by the IRS’s annual mileage rate. As we’ve just seen, that rate for 2020 has been set at 57.5 cents per mile.

  Here’s a quick example of how all of that might look in practice:

  Let’s say that you traveled a total of 12,000 miles in 2020 and that roughly 75% of those miles were demonstrably traveled for business-related purposes. That leaves you with 9,000 deductible miles for the year (12,000 x .75). As a final step, you’ll simply multiply that number by the 2020 mileage rate ($0.575), which leaves you with a standard mileage deduction of $5,175 for that tax year. Those are considerable savings!

• The Actual Expenses Method. The actual expenses method is a bit more complicated, but it can also open the door to huge savings if you’re willing to put in the time, attention, and effort. In contrast to the standard mileage method (outlined above), this method will require you to keep close track of all of your vehicle’s annual expenses, including (but not necessarily limited to):

  • Gas

  • Auto insurance payments

  • Maintenance (repairs, new tires, paint jobs, etc.)

  • Licensing and registration fees (keep in mind that these vary from state to state)

  • Auto lease payments.

  • Depreciation

  (For a complete list of vehicle-related expenses that can be deducted, click here.)

  To that end, you’ll need to save all of the receipts for vehicle-related expenses that you accrue throughout the fiscal year. In addition to enabling you to arrive at a factual figure, this will also make it possible for you to defend your claims in the case of an audit from the IRS.

  Once you’ve added up all of your vehicle’s expenses for the year, the final step of the actual expenses method will be multiplying that number by the most up-to-date IRS standard mileage rate (just as we did for the standard mileage method example above).

  This will give you the amount that you’ll be allowed to deduct for business-related travel expenses at the end of the fiscal year.

Final Thoughts

We all know that owning a car can occasionally be a pain (and a significant financial strain). But if you’re a small business owner or self-employed individual in 2020, it’s safe to say that the benefits of owning a car far outweigh the costs.

To take full advantage of owning a personal vehicle, however, it’s crucial to keep an eye on the IRS’s annual standard mileage rate. It’s also important to understand your options for claiming deductions – the standard mileage method versus the actual expenses method – so that when tax season inevitably arrives, you’ll be ready to file your taxes and receive maximum savings.

With that in mind, it’s also vital to keep careful records of all of your business-related travel expenses throughout the year. As mentioned above, an organized filing system can make your life significantly easier when you’re adding up your deductible expenses. It can also help cover your legal bases if you end up being audited by the IRS (an unlikely but not impossible scenario).

A physical filing system – such as a folder or filing cabinet – is a great place to start. Ultimately, it’s an even better idea also to use a digital filing system. By that, we mean that you should try to get in the habit of taking pictures of receipts from travel-related expenses and storing them in a separate folder on your phone or computer.

When it comes to backing up and storing your financial records, there’s no such thing as being too organized, too well-prepared, or too diligent about recordkeeping.

This year, in an economic climate that is forcing all of us to tighten our fiscal belts, it will be more important than ever to get the most out of your annual tax returns. Taking full advantage of your business’ travel mileage deductions is a great place to start.

Author

Chris Kolmar

Chris Kolmar is a co-founder of Zippia and the editor-in-chief of the Zippia career advice blog. He has hired over 50 people in his career, been hired five times, and wants to help you land your next job. His research has been featured on the New York Times, Thrillist, VOX, The Atlantic, and a host of local news. More recently, he's been quoted on USA Today, BusinessInsider, and CNBC.