IRS Tax Deduction of Vehicle Expenses: Cents-per-Mile or FAVR?

As a small business owner or self-employed professional, claiming vehicle expenses can be a crucial part of reducing your taxable income. The Internal Revenue Service (IRS) offers two primary methods for claiming vehicle expenses: the standard mileage rate and the fixed and variable rate (FAVR) method. Check our earlier post for an overview of IRS Accountable Plans. In this article, we'll compare these two methods so you can determine which one is right for your business.

Standard Mileage Rate

The standard mileage rate (aka "Cents per Mile") is fixed amount per mile that the IRS allows you to deduct for the business use of your vehicle. For 2023, the standard mileage rate for business miles is 65.5 cents per mile. To use this method, you'll need to keep a record of the number of miles you drive for business purposes throughout the year. You can then multiply that number by the standard mileage rate to determine your total deduction.

The standard mileage rate method is typically simpler and less time-consuming than the FAVR method. It's a good option if you have a relatively low mileage business and don't want to keep detailed records of your actual expenses.

However, there are some limitations to the standard mileage rate method. For example, you can't deduct any actual expenses you incurred for your vehicle, such as gas, oil changes, and repairs. Additionally, you can't use the standard mileage rate method if you've already claimed depreciation on the vehicle.

Fixed and Variable Rate (FAVR)

The FAVR method, on the other hand, allows you to deduct your actual vehicle expenses, including gas, oil changes, repairs, and depreciation. This method is based on a predetermined rate that includes fixed costs (like insurance and registration fees) and variable costs (like gas and maintenance).

To use the FAVR method, you'll need to keep detailed records of your actual expenses throughout the year, including receipts for repairs and maintenance. You'll also need to determine your personal use percentage and adjust your deduction accordingly.

The FAVR method is a good option if you have a high mileage business and want to claim all of your actual expenses. It can also be a better option if you have a more expensive vehicle or a vehicle that requires more maintenance.

However, the FAVR method is typically more time-consuming and requires more record-keeping than the standard mileage rate method. You'll need to keep detailed records of all of your expenses, which can be a challenge for some small business owners.

Which Method is Right for You?

Deciding between the standard mileage rate and the FAVR method depends on your specific business needs and expenses. If you have a low mileage business and don't want to keep detailed records, the standard mileage rate method may be the better option. However, if you have a high mileage business and want to claim all of your actual expenses, the FAVR method may be a better choice.

It's important to note that the IRS has strict rules for both methods. If you're unsure which method is right for your business, it's a good idea to consult with a tax professional or accountant who can help you make the best decision for your situation.

Conclusion

Claiming vehicle expenses can be a valuable way to reduce your taxable income as a small business owner or self-employed professional. The standard mileage rate method and the FAVR method are two options offered by the IRS. While the standard mileage rate method is typically simpler and less time-consuming, the FAVR method allows you to deduct all of your actual expenses. Consider your specific business needs and expenses to determine which method is right for you.