When it comes to deducting business vehicle expenses, the IRS offers two primary methods: the Standard Mileage Rate and the Actual Expense Method. Choosing the right one can have a significant impact on your tax savings. But which method should you use?
This guide breaks down how each method works, key differences, and when switching is allowed. Plus, we’ll explore how owning vs. leasing affects your deduction choices. If you're considering a vehicle purchase for your business, check out our guide on Vehicle Purchases and Tax Incentives for additional tax-saving strategies.
Standard Mileage vs. Actual Expense Methods
The Standard Mileage Rate is a simpler approach, while the Actual Expense Method offers more detailed tracking and potentially larger deductions.
How the Standard Mileage Method Works
The Standard Mileage Rate allows businesses to deduct a fixed amount per mile driven for business purposes.
2025 IRS Mileage Rate: .70 cents per mile
What’s Included?
- Fuel
- Maintenance
- Insurance
- Depreciation
Example: If you drive 10,000 business miles in a year, your deduction is: 10,000 × $0.70 = $7,000 tax deduction.
Best for:
✔️ Businesses with high mileage and low vehicle costs.
✔️ Simpler bookkeeping—just track business miles.
✔️ When using a personally owned vehicle for business purposes.
How the Actual Expense Method Works
The Actual Expense Method allows businesses to deduct the actual costs of using a vehicle for business purposes, based on the percentage of business use.
Deductible Expenses Include:
- Fuel & Oil Changes
- Repairs & Maintenance
- Insurance & Registration
- Depreciation (for owned vehicles)
- Lease Payments (for leased vehicles)
Example: If your total vehicle expenses are $12,000 and the car is used 75% for business, the deductible amount is:
$12,000 × 75% = $9,000 tax deduction.
Depreciation Considerations:
- If the business owns the vehicle, you must depreciate it separately over time.
- The vehicle is considered a fixed asset on your balance sheet.
Best for:
✔️ Businesses with low mileage but high vehicle costs.
✔️ Owners with high maintenance costs.
Standard Mileage vs. Actual Expense: Side-by-Side Comparison
| Feature |
Standard Mileage Rate |
Actual Expense Method |
| Best For |
High-mileage, low-cost vehicles |
Low-mileage, high-expense vehicles |
| Deduction Type |
Fixed rate per mile |
Based on actual operating costs |
| Record-Keeping |
Track miles only |
Track mileage and expenses |
| Depreciation |
Included in rate |
Deducted separately |
| Leased Vehicles |
Must use for full lease term |
Allowed but no depreciation allowed (lease payments are deducted as a business expense)
|
Can You Switch Between Methods?
Rules on Switching:
- If you start with the Standard Mileage Rate, you can switch to Actual Expenses in later years.
- If you start with Actual Expenses, you must continue using it for that vehicle.
Leased Vehicles Exception:
- If you use the Standard Mileage Rate for a leased vehicle, you must continue using it for the entire lease term.
Owning vs. Leasing: Which Method Works Best?
Your deduction choice may also depend on whether you own or lease the vehicle.
| Factor |
Owned Vehicle |
Leased Vehicle |
| Standard Mileage |
Allowed |
Allowed but must use for entire lease |
| Actual Expenses |
Allowed |
Allowed but no depreciation deduction |
| Best If |
You drive a lot of business miles |
Lease payments are high & operating costs are low |
📌 Key Takeaway:
- Owned vehicles allow more flexibility in switching methods and require depreciation tracking.
- Leased vehicles require consistency—once you pick Standard Mileage, you must stick with it for the lease term.
Which Deduction Method Should You Use?
- If your business vehicle logs high mileage with low costs, the Standard Mileage Rate is likely better.
- If your vehicle has high operating expenses, the Actual Expense Method may result in larger deductions.
- If you lease a vehicle, choosing Standard Mileage locks you in for the entire lease term.
- Switching between methods is possible but depends on how you started deducting the vehicle.
Need help choosing the best method? LedgerFi’s tax experts can help you maximize your vehicle deductions and stay IRS-compliant!
