What is the IRS Mileage Rate for 2018?

As an American in 2018, you can deduct some of the cost of running your car from your expenses if you use it for business purposes.

To do that, you need an efficient way of tracking your business expenses. You can use a mileage tracking app such as GOFAR, which not only tracks your business mileage but also finds your car’s sweet spot to help you drive more fuel efficiently.

GOFAR works in any OBD2 compliant car in the United States, Canada and over 50 other countries around the world.

Check your car’s compatibility here.

A mileage tracking app is an essential tool if you use your car for personal and business purposes because the Internal Revenue Service (IRS) needs sufficient proof that any mileage you claim is for business purposes only.

In the USA, the IRS prescribes two methods of claiming your car expenses against your taxes.

The Actual Expenses (AE) method where you are supposed to track all the costs incurred by your vehicle.

And the Standard Mileage Rate (SMR) – set by the IRS after taking into account the prevailing economic conditions and the cost of operating motor vehicles in a particular year.

IRS Standard Mileage Rate (SMR) for 2018

Work Expense CategoryIRS Rate Per Mile
Business54.5 cents
Medical Expenses and Moving18 cents
Charity Expenses14 cents

To arrive at the Standard Mileage Rate, the IRS considers business expenses including fuel and maintenance costs, travel expenses, gifts, and entertainment.

To be able to use the SMR for your tax deductions, you must:

  • Prove that you do not operate a fleet, i.e. more than five cars
  • Prove that you either lease the vehicle or you are the owner
  • Not have claimed your car’s depreciation by any other method other than the straight line method
  • Not be engaged in rural mail carrier business which will have already been reimbursed
  • Not have claimed special depreciation allowance on your car
  • Not have claimed the actual expenses of running your car using the Actual Expense method

If you commit your car for business use within the first year of ownership, you can use the SMR method to claim the mileage deduction.

In the subsequent years, you can opt to use the SMR or the Actual Expenses (AE).

If the car you are using for business drives is on lease and you opt to use the SMR method for tax deduction purposes, then you must use the same method until the end of the lease period and in all the subsequent lease renewals on the same vehicle.

The Actual Expenses Method (AE)

Before you decide that the Actual Expenses (AE) method is suitable for you, you will need to list down all the expenses of running your car.

You then need to distinguish which expenses you incur when running errands for your business.

Examples of these costs include:

  • registration fees,
  • servicing and repairs,
  • lease payments,
  • depreciation,
  • insurance,
  • fuel etc.

You then need to establish whether the Actual Expenses (AE) method gives you a larger deduction compared to the SMR method.

You need to put into consideration the fact that keeping the records of receipts for the Actual Expenses (AE) method is too cumbersome compared to mileage logging for SMR.

Ask yourself, is it worth it? If the deduction is large enough to warrant the cumbersome record keeping, then go for the Actual Expenses (AE) method.

Check out the vehicle expenses breakdown below shown on a ride-sharing example using both methods:

Vehicle expenses breakdown
Screenshot source: turbotax.intuit.com

How Do You Handle Depreciation?

The Modified Accelerated Cost Recovery System (MACRS) is used to depreciate all the cars that have been in service for business after 1986. However, there are some exceptions to this rule.

If for example, you used the SMR expenses deduction method and then subsequently used the Actual Expenses (AE) method, you are allowed to use the straight line depreciation method.

How Do You Substantiate Your Expenses?

If you are using the Actual Expenses (AE) method, you must keep the expenses that your car incur when running errands for business.

However, if you choose to use the SMR, all you need is to use a mileage log app to provide proof to the IRS that indeed the miles were incurred for business purposes.

What Are the Rules for IRS Mileage Deduction in 2018?

1. Mileage Deduction Rules for Employee

Employees qualify for business mileage deductions only when the employer has not reimbursed them.

As an employee, you are required to list ALL the expenses, and you can only claim them against tax if they exceed 2% of your adjusted gross income.

In the period starting 2018 to 2025, you are NOT allowed to make the deduction as it has been suspended by the Tax Cuts and Jobs Act of 2017 (popularly known as TCJA).

Tax infographic
Source: www.whitehouse.gov

2. Mileage Deduction Rules for Self-Employed

Self-employed individuals can claim their mileage against tax in the period between 2018 and 2025, and this is not affected by the 2% rule on adjusted gross income.

3. Mileage Deduction Rules for Health Purposes

If you drive for medical reasons, you are allowed to claim deductions, but they must exceed 7.5% of adjusted gross income if you are self-employed.

Note that this rate applies only for 2017 and 2018. If Congress does not extend this, the rate will go back to 10% of the adjusted gross income in 2019.

4. Mileage Deduction Rules for Moving

For the intervening period between 2018 and 2025, the TCJA has disallowed moving mileage deductions.

The exception to this rule is for specific military families that may be required by their duties to move.

How to Calculate Mileage Deductions for Taxes in the United States

In 2018, you can deduct 54.5 cents for every business mile you drove as long as you kept a proper record of your drives.

If, for example, a salesman drove 30,000 miles in 2018, mileage deduction will be:
30,000 miles x 54.5 cents = $16,350 (Total mileage deduction)

What Is Considered a Business Drive by the IRS?

Inter-Office DrivesDriving between two offices or work sites that are related to your office.
Supply or Business ErrandsExamples: visiting the banks, post office, supplier’s premises etc.
These errands quickly add up. Keep good track of them.
Meals or EntertainmentExamples include meals and entertainment
while hosting clients or suppliers.
Airport RunsMiles covered to and from the airport
Travel to Side JobsIf you do side jobs such as babysitting, lawn mowing,
pets care, etc., you are allowed mileage deductions.
Customer VisitsE.g., office to the customer’s site
Temporary JobsDrives to temporary jobs.
Job SeekingDrives to look for a job in the same industry.
Drive to look for a job in a completely different
sector for the first time is a disallowed mileage.
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