Auto Deduction: Actual vs. Mileage?
Mike Henninger • December 31, 2024
Auto Deduction: Actual vs Mileage
Auto Deductions: Actual vs. Mileage Method
This question comes up a lot: “Can I write off my vehicle and how can I maximize it without the IRS showing up at my door?” (this means, how can I do it legally)
If you’re a business owner, freelancer, or self-employed, you know the importance of tax deductions and if you use your car for business, this one’s for you.
The confusion that we often see in this discussion stems from the two ways to do it, actual method or the mileage method and what is allowed for each. So, let’s dive in.
First, what the heck is an Auto Deduction?
Before we get into the guts of this topic, let’s make sure we’re on the same page. If you use your car for business—whether you’re driving to meet clients, run errands, or haul stuff from point A to point B—you can claim a deduction for those business miles.
But the one thing we can’t stress enough, regardless of the method used, ALWAYS, ALWAYS, ALWAYS, document/track your mileage.
So, back to the topic, there are two ways to deduct your vehicle expenses:
The Actual Method or the Mileage Method. We are going to explain each and then at the end, give you 6 or 7 ways to determine the best strategy for you.
The Actual Method: Tracking the Details
The Actual Method got a turbo boost with the TCJA. Those benefits have decreased a bit in the last few years (we will discuss this) but can still be a powerful option.
- What You Deduct: You’re going to track all the expenses that come with using your car for business. That includes gas, oil, maintenance, insurance, registration, depreciation (or lease payments), and even interest on your car loan. Basically, every penny you spend on keeping your car running.
- How You Calculate: You need to keep track of the total miles driven during the year (business and personal) and then figure out what percentage of those miles were for business. If you drove 10,000 miles and 4,000 of those were for business, you get to deduct 40% of your total expenses. So, let’s say your total expenses were $6,000 for the year—40% of that is $2,400. That’s your deduction.
- The Pros: You can write off all the costs, including depreciation, which can be a big deduction for newer cars or more expensive ones. The TCJA brought 100% depreciation for vehicles over 6000 pounds (for the years 2018 through 2022 and has been decreasing since with a total phase out in 2027 unless extended) and also increased the luxury depreciation limit. We won’t be going into detail about depreciation here, but if you have questions about this, please feel free to reach out.
- The Cons: It’s a little tedious. You must track every single expense, every mile, and keep those logs and receipts. That means a lot of bookkeeping and organizing but under the right circumstances, it can be well worth it.
The Mileage Method: Simpler, But Not Always the Best
Now, let’s talk about the Mileage Method. This one’s like the “easy button” of auto deductions, and again, under the right circumstances, can be even better than the actual method. Here’s the scoop:
- What You Deduct: You get a set amount per mile driven for business. For 2024, the IRS is offering 67 cents per mile. So, if you drove 4,000 miles for business, you’d multiply that by 67 cents and get a deduction of $2,680. (This will be increased to 70 cents per mile in 2025)
- How You Calculate: Keep track of the number of miles you drove for business, personal and commuting. That’s it. No need to track gas, insurance, or repairs. Just a simple mileage count, and you’re done.
- The Pro: It’s simple. You don’t need to track every single expense, and you don’t need to sweat over depreciation or maintenance records. You just track miles and multiply by the IRS rate.
- The Con: You can’t write off things like gas, maintenance, or depreciation. So, if your car is a gas-guzzling beast or you do a ton of repairs, you might miss out on some big deductions.
So, Which Method Should You Use?
Now, the big question: Which method is right for you? Here’s the deal: it depends on your situation. Both methods have their perks and drawbacks, but you want to pick the one that gives you the biggest deduction. Here’s how you can decide:
- If you have a lot of business miles and a lower priced vehicle, mileage is probably best.
- If you have lower business miles and an average costing vehicle but drive it exclusively for business, actual.
- Low business miles with a higher costing vehicle used exclusively or primarily for business, actual will probably be better.
- Low business miles, lower costing vehicle used exclusively or primarily for business, the actual method will most likely beat the mileage method.
- If you have a day job and run a part time business, mileage is usually best.
- If you have a 6000+ lb. vehicle, the actual method usually wins.
- If you have a vehicle with high MPGs and average use/miles, the mileage method usually wins due to lower operating costs for the vehicle. Think electric cars, etc.
Final Thoughts
As anything IRS-related: there’s no one-size-fits-all answer. Each method has its pros and cons, and the right one for you depends on your unique situation. My advice? Take a few minutes to do the math. Get the mileage logs out, grab your receipts, and figure out which method works out to a better deduction. You might even want to try both methods one year to see which gives you a bigger deduction before you settle on one for the long haul. If you need help determining which is best, let us know. Book a call and see if we are a good fit.
But above all, don’t skip this! Auto deductions are legit, and leaving money on the table for some politician to waste is a terrible thing.
Now get out there and take full advantage of what’s yours! And remember what we always say:
“It’s time to use the tax code against the very people who wrote it” – Mike Henninger
A Fractional CFO can increase the value of your business...
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The Power of an “on demand” Fractional CFO: Unlocking Cash Flow, Revenue, and Profit for a Successful Exit As a small business owner, you’re likely wearing multiple hats—balancing day-to-day operations, customer relationships, marketing, and everything in between. But one of the most important pieces of the puzzle often gets pushed to the back burner: financial management . You might be great at running the business, but without the right financial strategy, growth can be slow, and a successful exit can feel like an uphill battle. This is where an “on demand” fractional CFO can truly change the game. In my experience, having an “on demand” fractional CFO is like having a secret weapon in your business arsenal—one that can supercharge cash flow, drive revenue, increase profit, and position your business for a profitable exit. It's an investment that pays massive dividends when you're planning for long-term growth and eventually selling your business. Here’s how a fractional CFO can transform your business. 1. Cash Flow Mastery: The Foundation of Stability Cash flow isn’t just an accounting term; it’s the lifeblood of your business. Without a steady, predictable cash flow, even the most profitable business can quickly find itself in trouble. A fractional CFO’s job is to make sure cash is flowing smoothly and consistently—keeping operations running, covering payroll, managing debt, and making sure there’s always enough liquidity for strategic growth. They’ll dive into the numbers to help you understand where your money is coming from and, just as importantly, where it’s going. They'll set up systems to track receivables, payables, inventory, and more. With their expertise, they’ll ensure that cash flow is optimized, forecasted, and strategically managed so you can stay ahead of potential gaps and seize opportunities when they arise. Let’s face it: You can’t grow a business if you’re constantly worried about cash. A fractional CFO makes sure your business is not just surviving but thriving—setting you up to scale and increasing your chances of a profitable exit when the time comes. 2. Driving Revenue: Taking the Guesswork Out of Growth Growing your revenue is where the rubber meets the road, but it’s also where many small businesses hit a wall. You can’t just rely on random bursts of sales or hope that the market will favor you. You need a strategy—a smart, data-driven strategy to build sustainable growth. This is where your fractional CFO becomes invaluable. Utilizing deep financial insight, they’ll help you understand the levers that drive growth—whether it's optimizing your pricing, improving your sales funnel, or diversifying revenue streams. They’ll help you create solid financial models to forecast revenue, track key performance indicators, and make decisions based on hard data instead of intuition. It’s all about taking the guesswork out of growing your business. A fractional CFO will identify the areas where you can scale quickly and efficiently, ensuring that revenue growth doesn’t come at the cost of your margins. They’re constantly on the lookout for opportunities to improve profitability while driving top-line growth. That’s a powerful combination when you’re gearing up for an exit. 3. Profitability: The True Measure of Success At the end of the day, revenue is important, but it’s profit that really matters. You could have great sales, but if you’re not managing your costs effectively, you're running in circles. A fractional CFO will help you drill down into the details of your operations, identifying areas where you can streamline costs without sacrificing quality or service. They’ll optimize your cost structure, help you renegotiate contracts, and eliminate inefficiencies that might be eating away at your margins. Whether it's tweaking your pricing strategy, adjusting supplier agreements, or improving your operating model, a fractional CFO will work to boost your profitability across the board. Profit is key, not just for keeping your business healthy, but for positioning yourself for a successful exit. Buyers or investors will want to see that your business is profitable and can maintain or increase that profitability after acquisition. A fractional CFO ensures you’re maximizing your profits in preparation for a sale, making your business more appealing to potential buyers. 4. Preparing for a Profitable Exit: Making Your Business Attractive to Buyers If you're thinking about selling your business down the line, you need to start preparing now . A successful exit doesn’t happen overnight, and a fractional CFO is the person you want in your corner to help you position your business for the highest possible return. They’re the ones who’ll guide you through the entire exit strategy process, from preparing your financials to managing negotiations. They’ll ensure that your business is running at its peak with well-documented financial records, a system to track KPI’s, strong cash flow, and optimized profit margins. They’ll also help you plan for the tax implications of the sale, ensuring that you get to keep as much of the sale price as possible. Most importantly, your fractional CFO can assist in crafting a growth story that makes your business irresistible to potential buyers. They’ll help you showcase your business's strengths, growth potential, and profitability, which is what buyers are looking for. They’ll also identify any areas of concern that could hurt the sale price, allowing you to address them before you enter the market. 5. Strategic Guidance at a Fraction of the Cost One of the most powerful aspects of having an “on demand” fractional CFO is that you get all the expertise of a seasoned financial leader without the full-time salary . For many small businesses, hiring a full-time CFO is simply not feasible, but a fractional CFO gives you access to that level of expertise at a fraction of the cost. Think of them as a strategic partner who can provide high-level guidance and bring clarity to your financial decisions. Whether you’re making day-to-day financial choices or planning for long-term growth, having a fractional CFO on board means that you have someone who’s constantly looking out for your best financial interests. Conclusion: The Bottom Line The path to a profitable exit is paved with solid financial decisions, and a fractional CFO is the partner you need to make those decisions with confidence. From mastering cash flow to driving revenue and increasing profitability, they provide the financial expertise necessary to take your business to the next level. Most importantly, they help you position your business for a successful exit —one that will leave you with the financial freedom you deserve. A fractional CFO is more than just a numbers person; they’re your strategic partner, your business’s financial architect, and the key to unlocking long-term success. If you're serious about growing your business and cashing out with maximum value, having an “on demand” fractional CFO is not just an option—it’s a game-changer.
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Starting a business is an awesome endeavor. It’s one where things can happen at breakneck speed. Often, we’re so focused on running the business (and rightly so) that some of the day-to-day administrative stuff gets lost in the mix. One of those things is, “how the heck do we get money out of the business?” In this article, we will be discussing the process for sole proprietors & single member LLC’s. A sole proprietor or single-member LLC owner can withdraw money from the business in different ways. Here are a few of the main options: Sole Proprietor: Owner's Draw: The sole proprietor can take out money through an owner's draw, which is simply withdrawing money from the business account for personal use. You’d literally withdraw money from the business account and deposit it into your personal account. This is not considered a salary or wage but rather a distribution of the business profits. The draw itself is not subject to taxes. The sole proprietor pays income and self-employment tax on the net income of the business, whether or not it’s taken out as a draw. Reimbursement of Expenses: If the owner has paid for business expenses out of personal funds, they can reimburse themselves from the business account. The manner of how this happens is important. Again, the reimbursement must be made from the business account to the owner. The business then records that transaction as a deductible expense. Another very important thing to mention is that the business account should never directly pay for personal expenses of the owner. It’s a common belief that, since the owner can take out money from the business account, that paying personal expenses right out of the business account is just semantics. IT’S NOT. If you want to pay personal expenses, take a draw, deposit it into your personal account and then pay the personal expense. Single-Member LLC: Owner's Draw: Like a sole proprietorship, the owner of a single-member LLC can take an owner's draw. The LLC's profits are passed through to the owner's personal tax return regardless of whether or not the owner takes the money out or lets it sit in the bank and is reported on their 1040. The draw itself is not subject to income or payroll taxes. The owner must pay income and self-employment tax on the net income of the LLC. Salary (if elected to be treated as an S corporation**): If the single-member LLC has elected to be treated as an S corporation (by filing Form 8832 or Form 2553 for S-Corp status), the owner must take a reasonable salary. This salary is subject to income and payroll taxes that the LLC must withhold and remit via payroll tax returns. Distributions: In addition to a salary, if the LLC is treated as an S-Corporation, the owner can also take distributions of the remaining profits. These distributions are not subject to income or self-employment tax. The activity from the S corporation that affects the owners tax liability is all reported on the owner's personal tax return via Form K-1. ** There are a lot of moving parts when deciding what is “reasonable” with respect to the salary of a S corporation shareholder. Many people believe that it’s based on net income, it isn’t. It’s based on distributions….this discussion is beyond the scope of this article, so PLEASE, talk to your tax advisor.
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Tax Ideas for Landlords
