Bad news for people who are accustomed to using the optional standard mileage rate to calculate the deductible costs of operating an automobile for business: the permissible deduction rate decreased by one-and-one-half cents, to 56 cents per mile, this year. This might lead you to claim a lower deduction for vehicle-related expenses in 2021 than you could for 2020 or 2019.
How to deduct vehicle expenses
Thankfully, it doesn’t have to be the standard rate. Businesses are also permitted to deduct the actual expenses attributable to business use of vehicles including gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. Business owners can also claim a depreciation allowance for the vehicle, although certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.
For some business owners, the cents-per-mile rate is useful because it saves you the hassle of tracking actual vehicle-related expenses. All you need to record is the mileage for each business trip, the date, and the destination.
This method is also a common way for employers to reimburse employees for the business use of their personal vehicles, and these reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes because employees can no longer deduct unreimbursed employee business expenses on their own income tax returns.
The 2021 cents-per-mile rate
Beginning on January 1, 2021, the standard mileage rate for the business use of a vehicle has been reduced to 56 cents per mile. This rate was 57.5 cents for 2020 and 58 cents for 2019.
Annual adjustments to the cents-per-mile rate are based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle. These include gas, maintenance, repair and depreciation. The decreased rate partly reflects the current price of gas, which is down from a year ago.
When you can’t use the standard method
Whether or not you can use the cents-per-mile deduction method depends partly on how you’ve claimed deductions for the same vehicle in the past and partly on whether or not the vehicle is new to your business this year. If the vehicle is new, you may want to take advantage of certain first-year depreciation tax breaks on the vehicle instead.
Unsure which method is right for you? We can help. If you have questions about tracking and claiming these expenses in 2021 (or claiming them on your 2020 income tax return), contact us.