Each year, the Internal Revenue Service (IRS) adjusts the standard mileage rates to account for inflation and changes in the cost of operating a vehicle. These rates are critical for calculating deductible expenses related to business, charitable, medical, or moving purposes. For 2025, the IRS has announced updated rates that taxpayers should note.
New Standard Mileage Rates Effective January 1, 2025
Starting January 1, 2025, the following standard mileage rates will apply:
- 70 cents per mile for business-related travel, an increase from 67 cents in 2024. This rate includes a 33-cent-per-mile allocation for depreciation.
- 21 cents per mile for medical purposes, down from 22 cents in 2024.
- 14 cents per mile for charitable purposes, a rate that has remained unchanged for over 25 years due to its statutory nature.
These rates offer a simplified way to calculate deductions without needing to track every expense related to vehicle use.
How Are These Rates Determined?
The IRS calculates these rates based on studies of vehicle operating costs:
- Business Mileage Rate: Includes both fixed and variable vehicle costs, such as fuel, maintenance, insurance, and depreciation.
- Medical and Moving Purposes Rate: Focuses solely on variable costs.
- Charitable Mileage Rate: Fixed by law and subject to Congressional action.
For charitable mileage, itemized deductions allow taxpayers to deduct directly related out-of-pocket expenses (e.g., gas and oil) but not broader costs like repairs, maintenance, or insurance.
Business Use of a Vehicle: Key Considerations
Taxpayers have the option to choose between the standard mileage rate or calculating actual expenses to determine deductions for business use of a vehicle. Both methods have advantages depending on circumstances.
Actual Expense Method
With the actual expense method, taxpayers can deduct specific costs, such as fuel, repairs, insurance, and depreciation. For newer vehicles, this method may offer higher deductions initially due to depreciation and bonus depreciation allowances:
- Bonus depreciation was 100% from 2018 to 2022.
- It decreased to 80% in 2023, 60% in 2024, and will be 40% in 2025.
However, once you use the actual expense method, you cannot switch back to the standard mileage rate for that vehicle. This rule is applied individually to each vehicle.
Limitations on the Standard Mileage Rate
The standard mileage rate cannot be used for vehicles:
- That have been previously depreciated under Section 179 or MACRS.
- Used for hire (e.g., taxis).
- Operated in fleets of more than four vehicles simultaneously.
Additional Deductions for Business Owners
Using the standard mileage rate doesn’t mean you’re limited to just that calculation. Business owners can also deduct:
- Parking fees and tolls related to business travel.
- State and local property taxes on the vehicle proportional to its business use.
Employer Reimbursement Policies
Employers can reimburse employees for business travel using the standard mileage rate. These reimbursements are tax-free if employees provide adequate documentation of:
- Time and location of travel.
- Mileage driven.
- Business purpose of the trip.
However, employees cannot claim unreimbursed vehicle expenses as deductions due to changes under the Tax Cuts and Jobs Act (TCJA), effective through 2025.
Self-Employed Taxpayers and Vehicle Deductions
Self-employed individuals can still deduct vehicle expenses using either the standard mileage rate or the actual expense method. Additionally, they can deduct the business-use portion of interest paid on an auto loan.
Advantages of Heavy SUVs for Business Use
Heavy sport utility vehicles (SUVs) weighing over 6,000 pounds but less than 14,000 pounds offer significant tax benefits. These vehicles are exempt from luxury auto depreciation limits, allowing businesses to:
- Claim a Section 179 deduction (up to $31,300 in 2025).
- Apply bonus depreciation after the Section 179 deduction.
Caution: Vehicles are classified as five-year property for tax purposes. If you sell or dispose of the vehicle within five years, a portion of the Section 179 deduction may need to be recaptured and included in taxable income.
Documentation Is Key
Accurate record-keeping is essential for substantiating vehicle-related deductions. Ensure you document:
- Mileage logs with dates, destinations, and business purposes.
- Receipts for fuel, repairs, and other expenses if using the actual expense method.
Seek Professional Guidance
Understanding the nuances of vehicle-related deductions can maximize tax savings while ensuring compliance with IRS rules. If you have questions about the best method to use or need assistance with documentation, consult a tax professional for personalized advice.
By staying informed about the 2025 mileage rates and associated tax rules, individuals and businesses can make strategic decisions to optimize their deductions.
