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Schedule C CPA compares 2013 Standard Mileage Rate and Actual Cost Auto deductions

IRS Schedule C CPA

Generally the Actual Cost method for deducting Auto Expense on IRS Schedule C reduces your tax bill more than using the  IRS Standard Mileage Rate method. (910) 399-02705.

Schedule C CPAs get asked which technique is better to deduct auto expense; the IRS standard mileage rate or the actual cost method? I’ll run a few simple auto expense examples for Schedule C filers. Auto expense is generally in the top three deductions on Schedule C (by dollar amount), so it’s important.

IRS 2013 Standard Mileage Rate for Schedule C

Sole Proprietorships and SMLLCs (Single Member LLC) can choose to deduct Auto Expense using the standard mileage rate. This is 56.5 cents per mile in 2013. Check with your CPA, or at least read IRS Publication 463 to fill in any gaps of this posting.  So your Auto Expense decution on Schedule C for 1,000 business miles is $565. Here’s a link to our past discussion on Schedule C auto expense.

What is the Standard Mileage Deduction really worth on Schedule C?

A Rule of Thumb: Dollars of Tax Saved per 1000 Business Miles

I find that Schedule C filers appreciate rules of thumb to help calculate how the IRS Standard Mileage Rate deduction cuts their tax bill. Some folks call it ballparking. So let’s see what a thousand business miles means in actual tax savings. Ballparking differs from the true figure, but is close enough for conversational purposes.

We’ll use 50 cents per mile, 1000 miles, and a 25% aggregated tax rate. Why? The math is simple.  Aggregate tax rate is just your IRS marginal tax rate plus your State income tax rate. So the example assumes you pay $250 of IRS and State tax on the last $1,000 of profit from your Schedule C business.

  • .50 x 1000 =$500 for the deduction on Schedule C.
  • $500 x 25% = $125 tax savings.
  • So 1,000 miles of legitimate business mileage saves you $125 in taxes.

Can you run your business vehicle 1,000 miles on $125?

No, let’s see what happens, through another rule of thumb. 1000 miles / 25 MPG = 40 gallons of gas. 40 gallons x $3.50 per gallon = $140. And of course this doesn’t even include the actual cost of the vehicle, insurance repairs, etc.

“In the past, using the Standard Mileage Rate on Schedule C came close to covering your actual costs without a lot of documentation. But now, we’re recommending using Actual Cost method for our Schedule C clients.”
– Gary Bode, Schedule C CPA and tax accountant

Our virtual office means we can serve your business wherever it is. The CPA license is essentially national. We serve a broad geographical base. For a free initial phone consult, call us at (910) 399-2705.

Using estimated mileage for the IRS Auto Expense on Schedule C

You’re expected to keep a mileage log. A notorious Tax Court case denied any standard mileage rate deduction because the Schedule C used estimated mileage. So, even though there was some legitimate business mileage, no deduction was allowed. Ouch.

You can’t switch from the IRS Standard Mileage Rate method and the Actual Cost method for deducting Auto Expense on Schedule C

The only time you have a choice between the methods is the first time you file Schedule C or put a “new” vehicle into use. So if you use the Standard Mileage Rate method for your first year in business, you’re stuck with it until you buy different vehicle. Each business vehicle is independent; you’re notlocked into a the same method for your entire fleet.

Actual Cost for Auto Expense

The actual cost method for Auto Expense on Schedule C gets complex. Why? Because depreciation and personal mileage are factors. Depreciation is the amount you can deduct for the purchase price of the vehicle this year. Here’s an example for 2013:

  • Depreciation $1,000.
  • Gas: $2,500.
  • Insurance: $500.
  • Repairs: $300.
  • Tires: $200.

So, $4,500 of actual costs for the tax year.

But, 500 of the total 17,800 miles was personal use mileage and not business related. So:

  • (500 miles /17,800 miles) x $4,500 of total Actual Costs = $126 of personal auto expense.
  • Actual Cost for the Auto Expense deduction on Schedule is $3500-$98 = $4,374.

“So most Schedule C filers have to keep a mileage either way: business mileage for the IRS standard mileage rate, or, personal mileage for the Actual Cost method”.
– Gary Bode, Schedule C CPA

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