Self-employed taxpayers who use a vehicle for business can generally deduct the business portion of its cost using either the standard mileage rate or the actual expense method. The choice affects the size of the deduction, the records required, and the options available in later years.
The Standard Mileage Rate
The IRS sets the business standard mileage rate each year. For 2026, the rate is 72.5 cents per mile for January 1 through June 30 and 76 cents per mile for July 1 through December 31 (IRS News Releases IR-2025-128 and IR-2026-29). The rate for 2025 was 70 cents per mile.
For example, a taxpayer who drives 6,000 business miles from January through June 2026 and 4,000 business miles from July through December 2026 would compute $4,350 (6,000 × $0.725) plus $3,040 (4,000 × $0.76), for a total of $7,390.
The rate is intended to cover the costs of operating the vehicle, including depreciation. Business parking fees and tolls are deductible separately under either method. According to IRS Publication 463, a self-employed individual can also deduct the business portion of interest on a car loan even when using the standard mileage rate.
Who Can Use the Standard Mileage Rate
According to the IRS, to use the standard mileage rate the taxpayer must own or lease the vehicle and must not:
- Operate five or more cars at the same time, as in a fleet operation
- Have claimed depreciation on the car using any method other than straight-line, or have used MACRS
- Have claimed a §179 deduction or the special (bonus) depreciation allowance on the car
- Have claimed actual expenses after 1997 for a car that is leased
For a car the taxpayer owns, the standard mileage rate must be chosen in the first year the car is available for use in the business. In later years, the taxpayer can choose either method. For a leased car, choosing the standard mileage rate means using it for the entire lease period, including renewals. A taxpayer who starts with the standard mileage rate and later switches to actual expenses must use straight-line depreciation over the car’s estimated remaining useful life.
The Actual Expense Method
Under the actual expense method, the business-use percentage, generally business miles divided by total miles, is applied to the costs of operating the vehicle, such as gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation or lease payments.
For example, if total vehicle expenses for the year, including depreciation, are $10,000 and 8,000 of the vehicle’s 10,000 miles were for business, the deduction is $8,000 (80 percent of $10,000), plus business parking and tolls.
Depreciation on a passenger automobile is subject to annual dollar limits. A §179 deduction is available only if the vehicle is used more than 50 percent for business, and the bonus depreciation allowance and accelerated MACRS depreciation also require more than 50 percent qualified business use. If business use later drops to 50 percent or less, excess depreciation may have to be recaptured into income.
For a vehicle the taxpayer owns, choosing the standard mileage rate in the first year preserves the ability to use either method later. Starting with the actual expense method and accelerated depreciation generally rules out the standard mileage rate for that vehicle.
Commuting Is Not Business Driving
According to IRS Publication 463, the cost of driving between home and a main or regular place of work is a personal commuting expense, no matter how far the distance and even if work is done during the trip. However, if a home office qualifies as the principal place of business, daily transportation between the home and another work location in the same trade or business can be deductible.
Recordkeeping
Vehicle expenses must be substantiated by adequate records or by sufficient evidence supporting the taxpayer’s own statement. In practice, that means a log recorded at or near the time of each trip showing the date, destination, business purpose, and miles, along with total miles driven for the year. Under the actual expense method, receipts and records of the vehicle’s cost and depreciation are also needed.
California Differences
California’s depreciation rules for vehicles differ from the federal rules. According to the Franchise Tax Board, California does not conform to federal additional first-year (bonus) depreciation under §168(k), limits the §179 deduction to $25,000, and does not conform to federal modifications to the depreciation limits for luxury automobiles. A vehicle deduction computed under the actual expense method can therefore differ between the federal and California returns.
Choosing a Method
The IRS suggests that taxpayers eligible for both methods figure the deduction both ways. The standard mileage rate is simpler. The actual expense method may produce a larger deduction for a vehicle with high operating costs or high business use, but it requires more records and has longer-term consequences through depreciation.
The Bottom Line
Both methods are legitimate, and each has rules about when it can be used. The method chosen in the first year a vehicle is used in the business can limit later choices, and either method depends on a reliable mileage log.
Questions about business deductions?
Tax attorney Cassra Minai, Esq. can review your situation in a confidential consultation.