Companies that use vehicles in their line of work can deduct certain operating costs from their taxable income.
The IRS supports two methods for calculating these costs: the standard mileage method and the actual expenses method.
In this guide, we’ll provide an overview of both methods, see how the two compare, and help teams understand when each option is the better choice.
Standard mileage vs. actual expenses
The standard mileage and actual expenses methods are two approved methods by the IRS for businesses to calculate vehicle expenses.
As the name suggests, the actual expenses method requires the company to track all costs associated with owning and operating the vehicle for business purposes during the reporting period. At the end of the period, all these costs are tallied to determine the total tax deduction.
On the other hand, the standard mileage method requires the operator only to track the mileage used for business. Then, they apply the IRS-approved standard mileage rate to calculate the total vehicle expense for the period. In 2025, the rate for self-employed individuals and businesses is $0.70/mile.
The actual expense method
The actual expense method can be a bit more tedious and time-consuming than the standard mileage approach. It requires vehicle operators to keep a record of every single cost they incur while using the vehicle to prepare the deduction amount.
Some of these costs may include:
- Lease payment
- Auto loan repayment
- Auto insurance
- Registration fees
- Fuel
- Vehicle maintenance
How to calculate actual expenses
Calculating actual expenses is relatively straightforward if the team has kept a record of all related costs incurred throughout the period. The team can simply total up all the qualifying expenses to find the total deduction amount.
Let’s say a flower shop owns a delivery van and tracks the following costs during one month:
- Loan repayment: $550
- Auto insurance: $175
- Registration fees: $25
- Fuel: $350
- Oil change: $125
In this case, the actual expenses would total $1,225. Importantly, companies must carefully total only the business-related expenses. Using the above example, if the flower shop owner uses their personal vehicle for deliveries, they can only deduct the portion of expenses incurred for business use.
So, if the business owner incurs $1,225 in vehicle expenses for the month, and estimates they used the van half of the time for business use, the amount they could deduct from business taxes would be:
$1,225 * 0.50 = $612.50
Record-keeping requirements for actual expenses
To use the actual expenses method, businesses must maintain extensive records and documentation to support the deductions they claim on their tax return. The documentation should include the transaction amount, the date, and a description of what was purchased.
This means holding on to all gas receipts, service orders for maintenance, loan repayment confirmation, and more.
The standard mileage method
The standard mileage method is often seen as the simpler option between the two. Rather than tracking all vehicle-related expenses diligently, operators only need to monitor the number of miles driven for business purposes.
How to calculate the standard mileage rate
To calculate the deduction using the standard mileage rate, accountants will need to know the total mileage used during the period and the current standard mileage rate set by the IRS. Multiplying these two values together will provide the deductible vehicle expense for the period.
Using the example of the flower shop from above, the owner records the starting mileage on the van’s odometer as 67,500 at the beginning of the month and 68,750 at the end of the month. We can recall that the standard mileage rate for businesses is currently $0.70/mile.
If the van was only used for business deliveries, they could make the following calculation to find the vehicle expense:
1,250 miles * $0.70/mile = $875
Benefits of the standard mileage method
- Doesn’t require teams to keep detailed records and receipts of all vehicle-related expenses for business use
- Tends to provide a greater deduction for those who drive a lot in the course of doing business
- The calculation is much more straightforward and leaves less room for error
Limitations of the standard mileage method
- May not provide the maximum deduction if the team incurs high vehicle costs for maintenance or repairs
- Doesn’t allow businesses to deduct related vehicle costs that aren’t mileage-specific, like insurance premiums or registration fees
- The IRS doesn’t permit the standard mileage method for all businesses, like those that have five or more vehicles
Which method gets you the biggest tax deduction?
With both options available to most businesses, it can be challenging to decide which one to use.
In general, businesses should choose the method that will provide them with the largest tax deduction. Even still, this depends on the nature of the business, individual driving habits, and the team’s willingness to keep track of vehicle expenses.
When the actual expenses method makes sense
Since the actual expenses method allows teams to deduct the exact costs the business incurs, rather than an estimated cost based on mileage, it’s typically a better option for businesses with high-cost vehicles.
Maybe the vehicle has low mileage, but still has expensive insurance premiums and maintenance costs. In this case, the actual expenses method provides a more accurate representation of the vehicle expenses incurred by the business, which may result in a larger tax deduction.
Let’s say there’s a contractor with a heavy-duty truck that they only use to haul equipment and drive short distances between the head office and job sites in the area. The truck may only incur 7,000 miles in a year, which, using the standard mileage method, would result in a deduction of $4,900.
However, this vehicle may have an annual depreciation expense greater than this amount, not to mention the other costs the business incurs to register it, insure it, and pay for gas and maintenance. In this case, the actual expenses method makes more sense.
When the standard mileage method makes sense
In contrast, the standard mileage method may provide a greater deduction for those who drive long distances for business purposes, especially if they incur low maintenance and ownership costs.
In this case, the standard mileage rate may be an accurate representation of the ongoing operating costs and wear and tear that the vehicle endures from regular business use.
For instance, a sales representative may have a lower-priced sedan in the middle of its useful life and drive 20,000 miles or more per year in it to see clients in their region. In one year, the rep drives the car 26,750 miles for business purposes, resulting in a deduction of $18,725 using the standard mileage method.
The actual expenses might total much less than this amount:
- Annual depreciation expense: $5,000
- Maintenance costs: $2,500
- Gas: $4,000
- Insurance premiums: $1,200
- Registration costs: $200
Thus, the deduction of $18,725 from the standard mileage method makes more sense than the actual expenses totalling $12,900.
Additional considerations for small business owners
Deductible vehicle expenses can have a number of implications for small business owners. Reflecting on these can help them understand the importance of choosing the right calculation method and remaining consistent with tracking.
Impact on self-employment tax
Any mileage deductions help to reduce a business owner’s gross business income on their Schedule C, thereby resulting in a lower self-employment tax.
As such, business owners should be aware that choosing the method that results in the largest deduction may help them face a lower tax bill for the period.
Combining both methods for different vehicles
The IRS permits using both methods on different vehicles at the business owner’s discretion. In other words, it’s possible to use the actual expenses method on a lower-mileage, high-maintenance truck and the standard mileage method for a vehicle that is used for long distances and has lower maintenance costs.
Again, business owners should carefully consider which method would result in the highest total deduction across their fleet.
Consulting with a tax professional for tailored advice
Business owners with complex needs or those just starting out may not feel comfortable making the decision between standard mileage and actual expenses on their own. In some cases, it may make sense to speak with a licensed tax professional for their expert guidance.
Tax-related matters can feel daunting to those who are self-employed. The risk of miscalculating or improperly recording vehicle deductions could put the taxpayer at risk of an audit from the IRS, as well as penalties or fines should they discover an error.
Tools and resources for calculating deductions
Whether using the actual expenses method or the standard mileage approach, it can be helpful for business owners to utilize dedicated tools to track mileage and other vehicle-related expenses.
This way, all the necessary data is compiled in one convenient location. Plus, in a digital format, there’s no risk that an important paper receipt or service order will go missing.
Simplify expense tracking with BILL
With BILL Spend & Expense, teams can take advantage of free expense management software that gives them more visibility and control over spending.
Issue employees a BILL Divvy Card to purchase gas and pay for other vehicle-related expenses while setting custom spending limits to keep the team on budget.
Then, monitor and approve spending in real-time, saving you and your team from manually preparing expense reports.
Start your free trial of BILL today to get started!
Frequently asked questions
When can you not use the standard mileage rate?
You cannot use the standard mileage rate if your business operates five or more vehicles, if you use a depreciation method other than the straight-line method, or if you applied the actual expenses method in the first year your business used the vehicle.
Can you charge more than the standard mileage rate?
No, you cannot claim additional vehicle expenses in addition to the standard mileage deduction. The standard mileage rate is meant to represent all the costs of owning and operating a vehicle for business use, including gas, repairs, depreciation, insurance, registration fees, and more.
How many miles can you write off without getting audited?
There is no set mileage that automatically triggers an IRS audit. To avoid an audit, accurately report the mileage used for business purposes and have documentation to support it, such as odometer photos or a mileage tracking app. Don’t round up, and be familiar with reasonable usage for your industry to understand what the IRS may view as suspicious.
Is it better to claim fuel or mileage on taxes?
Claiming fuel costs with the actual expenses method makes more sense for certain businesses, while using the standard mileage option is a better choice for others. Each business will need to determine which option would provide them with the largest deduction based on their driving habits and vehicle costs, among other factors.
