The price of gas is down from a year ago. How does this affect the amount your business can deduct for business driving in 2021?
This year, the optional standard mileage rate used to calculate the deductible costs of operating an auto for business decreased by 1.5 cents, to 56 cents per mile. This is the second year in a row the cents-per-mile rate has decreased.
Actual expenses vs. mileage
In general, businesses can deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. You also can claim a depreciation allowance for the vehicle. In many cases, however, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.
The cents-per-mile rate is useful if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. Even so you must record certain information, such as the mileage for each business trip, the date and the destination.
The cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements are a nice benefit for employees who drive their personal vehicles extensively for work. Why? Under current law, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you use the cents-per-mile rate, know that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to employees.
The 2021 rate
Beginning January 1, 2021, the standard mileage rate for the business use of a car (or van, pickup or panel truck) is 56 cents per mile. It was 57.5 cents for 2020 and 58 cents for 2019.
The business cents-per-mile rate is adjusted annually based on studies commissioned by the IRS. The study looks at the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.
When this method can’t be used
In some situations the cents-per-mile rate can’t be used. This may be depend on how you’ve claimed deductions for the same vehicle in the past. In other cases, it depends on whether the vehicle is new to your business this year or you want to take advantage of certain first-year depreciation tax breaks.
We can help
As you can see, you have many factors to consider when deciding whether to use the mileage rate to deduct vehicle expenses. We can answer your questions about tracking and claiming such expenses in 2021 — or claiming them on your 2020 income tax return.