Deducting business miles for your online business is one of the most overlooked legitimate deductions the IRS allows.
Many new sellers on marketplaces like eBay and Etsy are unaware or unsure that the business use of their personal vehicles can be deducted from their profit for mundane trips like driving orders to the post office, picking up supplies from vendors, or even driving to garage sales and thrift stores to find new inventory.
In most years, mileage is simple. It’s the same per-mile amount allowance throughout the year. But for 2022, the IRS made a mid-year adjustment to account for the rise in gasoline prices.
For business purposes, eligible miles driven from January 1, 2022 through June 30, 2023 can be deducted at 58.5 cents per mile. Starting on July 1st and for the remainder of 2022, the mileage rate on eligible business miles is 62.5 cents.
And this week, for 2023, the IRS announced another increase in the business mileage deduction of 3 cents to 65.5 cents per mile.
Using mileage is one of the simplest ways to reduce the tax burden on profits. While the IRS allows for an actual expense method — meaning keeping track of vehicle expenses such as gas, oil changes, tires, car washes, insurance, and depreciation — it is far easier and often more beneficial to take a standard mileage deduction when the vehicle is used for both personal and business use.
Business Miles: Actual Expense vs. Standard Mileage Deduction
If a vehicle is used for both personal and business purposes, only the percentage of the business use can be deducted using the actual expense method.
For example, let’s say a vehicle is driven for 16,000 miles in 2022, and 4,000 miles were for eligible business purposes, which would mean only 25% of the actual expenses can be deducted.
Assuming gas for the year was $2,240, insurance $1,500, repairs $1,200, oil and tires $600, car washes $240, and depreciation $2,000, totaling $7,780 in car expenses for both personal and business use.
The business portion would be $1,945 (25%) using the actual expense method, or $2,420 using the standard miles method. The example assumes business miles were evenly split between both halves in 2022.
In this scenario, the standard mileage deduction is more favorable for taxpayers than using the actual expense method. Most small business or home-based sellers will find that is typically the case.
Of course, there are record-keeping requirements and limitations, which are all detailed in IRS Topic No. 510. If you failed to keep good records for 2022, you wasted a lot of money and you should immediately keep a log of your business miles as outlined in the aforementioned IRS Topic guide.
Most online tax preparation solutions will walk taxpayers through deducting mileage on their tax returns (in addition to other legitimate business expenses), but having a solid trip record of the business miles driven is always a requirement.
And if you are new to running a business, and didn’t set up a special business entity such as an LLC or Corporation, you are likely a sole proprietorship — meaning you are using your social security number as your tax id — in which case you would need to file IRS Form 1040 Schedule C to deduct legitimate business expenses, including business miles.
The good news is that most online tax software companies allow you to sign up and complete your tax return for free. Charges typically only apply when you submit your tax forms to the IRS and your state’s tax agency (if applicable).
To summarize Standard Mileage Deduction rates:
- January 1, 2022 through June 30, 2022: 58.5 cents per mile.
- July 1, 2022 through December 31, 2022: 62.5 cents per mile.
- Effective January 1, 2023: 65.5 cents per mile.*
* While not typical, the IRS may adjust the rate in 2023, and we will update this post should that occur.
Tip: Check our post on IRS tax filing deadlines in 2023 for when you must file your 2022 tax return or make quarterly payments for this year.
Disclaimer: This information is a general guide that should apply to a broad segment of taxpayers. It is not personalized advice. We strongly recommend you read the IRS bulletins on the topic covered herein or consult a tax or legal professional for advice.
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