The Internal Revenue Service (IRS) allows a standard mileage deduction for travel relating to business or employment, charitable contributions and medical and moving expenses. You have two options for deducting these expenses: deduct the actual expenditures made during this travel, or take the mileage deduction. Simply multiply the number of miles you drove by the mileage rate for the type of travel.
Determining Mileage Eligibility
The IRS outlines the eligibility requirements for employee-related deductions in Publication 463. These requirements are subject to change on an annual basis, so check the IRS website to ensure that your travel qualifies for the tax year you are filing. In general, mileage is deductible if you are traveling away from home for more than one day for a bona fide business purpose, but there are many exceptions and extensions to this standard. Publication 463 details various kinds of travel and examples to clarify whether your travel is deductible. Employee deductions are itemized on IRS Schedule A.
Small business owners can deduct business mileage for travel away from their primary place of business; travel between home and the office is not deductible, but it generally is when traveling from that office to client sites. Check the documentation for IRS Schedule C, Business Deductions, for details.
The IRS also allows a deduction for mileage related to moving and medical expenses, which is itemized on Schedule A.
Mileage or Actual Expenses
You have two options for your itemized deduction. The first is to keep receipts for your deductible travel, and to take the actual expenses as a tax deduction. This is more straightforward than a standard deduction, but has a major drawback: If you use your car for nondeductible personal travel and deductible travel, it is impossible to determine what portion of your wear-and-tear expenses are deductible.
The mileage deduction was created to work around this problem. By tracking the actual mileage you drive for deductible purposes, you can itemize a deduction based on mileage rather than expenses. The IRS deduction rate is designed to include all costs related to travel, including gasoline and upkeep, so a mileage deduction theoretically will give you a more accurate reimbursement than strict expense tracking. To be certain, track your mileage and your expenses, then take whichever deduction is greater.
Over the course of a tax year, keep track of your deductible mileage, and categorize each trip based on the kind of deduction it is allowed. Multiply this total by the mileage deduction. For example, in 2012 it was $0.555 for business travel, $0.14 for charitable travel and $0.23 for medical and moving expenses. These rates vary annually, so check the IRS website for the rates for this tax year. Enter these deductions into their line items on Schedule A or C as necessary.