What is the Actual Expense Method?

Actual Expense Method

Share This...

Actual Expense Method

The actual expense method is a method of determining deductible expenses for business or work-related use of a personal vehicle, or other work-related expenses. Under this method, individuals track and record their actual expenses incurred during the business use of their property or vehicle, rather than using a standard deduction or mileage rate.

Examples of actual expenses that can be deducted using this method include:

To determine the deductible amount for business use, individuals should maintain detailed records of their actual expenses and the business use percentage of the property or vehicle. The business use percentage is calculated by dividing the total business miles driven by the total miles driven during the year. The deductible amount is then calculated by multiplying the actual expenses by the business use percentage.

It’s important to note that the actual expense method requires diligent record-keeping and may be more time-consuming than other methods, such as the standard mileage rate method for vehicle expenses. However, it can result in larger deductions for those with high operating costs or low mileage.

Example of Actual Expense Method

Let’s say you use your personal car for both personal and business purposes. To determine the deductible amount for business use of your car using the actual expense method, you need to track and record all the expenses related to your car for the tax year.

Suppose you have the following expenses for the year:

  1. Fuel and oil: $3,000
  2. Maintenance and repair: $1,200
  3. Depreciation: $2,500
  4. Insurance: $1,500
  5. License and registration: $300
  6. Parking and toll fees (for business use): $100

Total expenses for the year: $8,600

Now, let’s say you drove a total of 20,000 miles during the year, out of which 8,000 miles were for business purposes. To calculate the business use percentage, you would divide the business miles by the total miles driven:

Business use percentage = 8,000 (business miles) / 20,000 (total miles) = 0.4 (40%)

Finally, to determine the deductible amount, multiply the total expenses by the business use percentage:

Deductible amount = $8,600 (total expenses) x 0.4 (business use percentage) = $3,440

So, using the actual expense method, you can claim a deduction of $3,440 for the business use of your car for the tax year. Remember to maintain detailed records of all your expenses and the miles driven for business purposes to substantiate your claim.

Other Posts You'll Like...

Want to Pass as Fast as Possible?

(and avoid failing sections?)

Watch one of our free "Study Hacks" trainings for a free walkthrough of the SuperfastCPA study methods that have helped so many candidates pass their sections faster and avoid failing scores...