The Actual Car Expense Deduction Method: How and When to Use It.

As an independent contractor in the gig economy (Doordash, Uber Eats, Instacart, Lyft, etc.), the IRS lets you choose how to write off your car expenses. You can either claim the actual cost of driving, or claim a standard mileage allowance (a flat rate per mile driven).

How do you know which is better? How does it work if you claim actual expenses, and what exactly can you write off?

When you know how the actual expense method works, you'll better understand how to evaluate both options. We'll dig into all of that, looking at:

• How the actual expense method works
• A list of items you can claim using the actual expense method
• Deciding between mileage and actual expenses
• Some warnings about claiming actual expenses instead of miles
• Additional questions about the actual expense method

About this article

The purpose of this article is to examine how to claim car expenses as self-employed independent contractors in the United States. Other nations have their own tax regulations and may do things differently. You should seek a tax professional who can help you with your own local and national tax situation.

This website focuses on running your business as a gig economy independent contractor, especially in the delivery sector. Many examples will relate to delivering for delivery companies such as Doordash, Instacart, Uber Eats, and Grubhub, to name a few. However, the concepts here relate to most forms of self-employment.

This is not tax advice. The purpose here is to educate and explain how U.S. taxes work for independent contractors. If you need advice related to your particular tax situation, you should seek a tax expert who can guide you individually.

How the actual expense method works.

To use the actual expense method, you must determine what it actually costs to operate the car for the portion of the overall use of the car that's business use. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.”

Topic 510 on the IRS website

In an effort to simplify tax reporting, the IRS allows self-employed business operators to write off a flat rate per mile instead of claiming actual expenses. For 2024 miles, that rate is $0.67 per mile. It jumps to 70¢ per mile in 2025.

However, they give you a choice whether or not to take that mileage allowance or claim the business portion of the actual expenses related to driving. It's important to understand that the mileage allowance is a substitution for claiming the cost of driving. In other words, you can only use one method. Claiming any of the actual expenses on top of the mileage rate is a form of duplicating a deduction.

How to claim actual expenses.

There are three things you must do to determine your actual expense deduction:

1. Add up all of the actual costs of driving. We'll discuss those costs later.
2. Determine what percentage of your car use is for business.
3. Multiply the business usage percentage by the actual cost of driving to determine what you can write off.

Your best practice, regardless of claiming actual expenses or miles, is to keep a log of your business miles. Doing so lets you see what you can write off using either method. That log is also the best way to calculate the exact percent of miles driven for business.

You should record your odometer reading at the start and end of each year. That tells you how many total miles you drove your car. Divide the number of business miles for the year by total miles. This gives you your business percentage.

For example, suppose you drove your car 30,000 miles for the year, and 16,000 of those miles were for business.

16,000 ÷ 30,000 = .5333 (53.33%)

Using this example, if your total vehicle costs are $19,000, 53.3% of that would be $10,133.

You can claim that amount regardless of whether you itemize your personal tax deductions. That is because this is a business expense, not a tax deduction. For this example, you would list $10,133 on line 9 (car and truck expenses) of IRS form Schedule C.

What Car Expenses are Allowed for the Actual Method?

Actual car expenses are the costs of operating your car. They include fuel, maintenance, repair, and the cost of ownership.

Here are the items you can claim as part of your actual car expenses:

• Depreciation. Depreciation is the loss of value of your car. A car is a capital asset, meaning buying the car is not an expense. However, the value lost due to age, wear, and tear is an expense. Depreciation can not be claimed if you lease the car.
• Licenses and registration fees. Include any of the costs of registering and licensing your car.
• Oil, maintenance, and repairs. Any work to keep your car running in good condition. Any repair items or replacements.
• Replacement items such as tires: Wiper blades, tires, shocks, etc.
• Gas. The fuel needed to operate your car. If you have an electric vehicle, this would include the cost of charging your car
• Insurance. Regardless of whether you have a personal or commercial auto insurance policy, the cost of insurance is part of the actual cost of the car.
• Tolls and parking. These are your day-to-day parking and toll fees, not parking and tolls related directly to your business activity.
• Lease payments. If you lease your car, the lease payment is deductible. However, you can not claim depreciation. This is because when you lease, you do not own the vehicle. Note that if you have a car loan, the principal on the loan payment is NOT deductible.

Is it better to take claim the actual expense or the standard mileage allowance?

The answer depends on your vehicle, the overall costs, and how much overall driving you do. There are two major factors that can make a big difference: annual mileage and the value of the car.

The number of miles you drive makes a difference because some of these costs are fixed. In other words, they're the same regardless of how far you drive. One of the largest “actual expenses” is depreciation. The IRS formula for depreciation doesn't change based on miles.

Say you have $5,000 in fixed costs (depreciation, registration and insurance). If you put 10,000 miles on your car for the year, that comes out to 50 cents per mile. However, if you drove 25,000 miles, the per-mile amount for those items drops to 20 cents.

The more miles you drive, the more likely your actual expense total per mile for the year will be lower than the standard mileage rate.

The age and value of a car also impact the actual cost. This is because of a number of reasons:

• The IRS uses somewhere around a fifth of the purchase price of your car for depreciation (give or take depending on how long you've had it and other factors). There's a big difference between writing off $6,000 for a $30,000 car and claiming $400 for a $2,000 vehicle.
• Insurance costs increase substantially for newer and more valuable vehicles. You may need full coverage on a new car but liability only for an older vehicle.
• Many states charge significantly more in license and registration fees for newer cars.

For all these reasons, a new electric vehicle can often cost a lot more to operate than an older gas guzzler, thanks to additional insurance, registration, and depreciation costs.

The bottom line is, if your car is newer or more valuable, the actual expense deduction may be better for you. However, if you put excessive miles on your car, that may swing things back in favor of the standard rate.

Your best practice is to keep track of both, so that you can make a good comparison.

Things to think about when claiming actual expenses.

The rules are kind of tricky around all of this. So much so that it really becomes a good idea to consult a tax professional to figure this all out.

You cannot claim your car payment.

Buying a car involves trading one asset (money) for another (the car). Being an asset, the IRS sees it the same as they do cash. Because of that, they don't see that purchase as an expense.

A purchase becomes an expense when you have fewer assets after the transaction than you did before. For that reason, a car purchase is not an expense.

It's only when the car loses value that an expense happens. This is where depreciation comes in.

Therefore, you can't write off the purchase price, nor can you claim the car payment. The only thing you can claim is depreciation.

Depreciation can be complicated.

The IRS has a lot of rules about how to depreciate a car. I'm not going to try to explain it all but we'll talk a little about how it works.

This is important because depreciation is often the one thing that makes a difference between claiming the standard mileage method or the actual expenses. Basically, they give you five years to write down the purchase of your car.

How you do that can be complicated. They have several different methods, and calculations involve what time of year you bought the car, how long you had the car, and if there's a value of the car after depreciation.

You may have to claim income for the sale of a depreciated car.

The IRS has formulas to determine how much a car's value drops. However, the final determination is how much money you received when you finally got rid of it.

Say you bought a car for $30,000, and five years later, sold that car for $10,000. The actual depreciation of the car is $20,000 because that's the difference in value.

If you already wrote off the entire purchase price by the time you sell it, the $10,000 that you received for selling is now income. That's because the value didn't actually drop $30,000, but only by $20,000, however, you already claimed the full $30,000.

If you wrote off 75% of the car (as 75% of your miles were for business) you'd have to claim 75% of that sale price ($7,500) as income.

Claiming depreciation usually means you should get a tax pro (or claim miles).

All of the calculations and rules about depreciating a car are complicated enough that it's easy to make a mistake. It's very much worthwhile to engage someone who understands all of this and can help you figure it out.

If you claim actual expenses in the first year you claim expenses on the car, you can never take the mileage deduction for that car.

It's not as easy as switching back and forth from one year to the next. If you claim actual expenses the first year you used a car for business, you're committed to the actual expense method.

If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses.

IRS Publication 463

You might find the actual expense method lets you write off a little more for the first year you use your car for business. However, even if the mileage allowance is far better in later years, you won't be able to claim it.

That's usually the case because of how depreciation works. You can often write off a large chunk of the purchase price the first year, but in later years can't claim as much. In the long term, it may still be far better to claim the mileage rate.

You need to track expenses for each car separately.

Your decision to use standard mileage or actual expense is one you make on a car-by-car basis. You might have an old beater that doesn't cost much per mile, and also a new car.

You'll want to track your expenses and business miles on both cars. You might be better off claiming the 67¢ per mile on the beater but claiming actual expense on the new car.

You still have to track your miles when claiming actual expenses

When you fill out your car information on Schedule C, the IRS asks if you have written evidence for your deduction.

You must have that evidence whether you use the standard mileage allowance or the actual expense method. Part of that evidence includes documentation that you used your car for business.

Table 5-1 in Publication 463 details the record-keeping required. Under transportation, they state that you need to have records of the cost of the car and improvements AND the mileage for each business use.

You can not simply estimate your business use percentage. The IRS makes it clear that you need documentation of your activity regardless of the method you choose.

Additional questions about the actual expense method

Is the interest portion of a car loan deductible under the actual expense method?

No, but it's still deductible, just in a different way. Interest is a different type of expense, claimed on a different part of Schedule C. Read more here:

How do parking and tolls work?

Parking and tolls that are directly related to a business trip are claimable regardless of whether you claim mileage. Because they're business-related, you can claim 100% of those costs. Additional parking and tolls that don't have a business purpose are added into the actual cost of driving.

Can I claim home charging costs for an electric vehicle as part of actual expenses?

Yes. Electrical charging is a form of fuel, meaning you can claim the portion of your electric bill that went towards charging your car.

Many home EV chargers, like this ChargePoint Home EV charger on Amazon (affiliate link), let you see how many kilowatt hours were used. You can multiply that by your electric company's kWh rate to determine the cost of electricity.

If you don't have a meter for your charger, it's possible to determine roughly how many kWh you used based on the manufacturer estimated range. For instance, Nissan says the 2022 Leaf will get 149 miles on a 40kWh charge. That's 3.725 miles per kWh. 10,000 miles would be about 2,685 kWh. If your rate per kWh is 8 cents, that's about $229 to charge your car.

Of course, if you used charging stations, you'd need to adjust accordingly. You can also include the costs for such remote charging.

Can I include the cost of upgrades to my car?

Let's say you decided to add a high-end paint job to your car. Is that an “actual expense?”

This is a grey area, and best to ask your tax pro.

My understanding is that a major enhancement is treated the same as a purchase. It's something that adds value to the car rather than a cost of operating, meaning it has to be capitalized. If I'm correct, you couldn't include it in the actual cost calculation but could use it to factor in depreciation costs.