Mileage or actual expenses? Vehicle costs for contractors

For most contractors the vehicle is the second largest cost in the business after labour. There are two ways to claim it, they produce different numbers, and almost nobody checks which one is better for their situation.

The two methods

Standard mileage. You track business miles and multiply by a published per-mile rate. That rate is intended to cover everything — fuel, maintenance, insurance, depreciation.

Actual expenses. You track what the vehicle really costs — fuel, repairs, tyres, insurance, registration, depreciation or lease payments — and claim the business-use share.

Both require you to know your business mileage. There is no version of this where you avoid tracking miles.

Which usually wins for a contractor

The standard rate is calibrated around a typical passenger car. A contractor's truck is generally not that.

A heavy work vehicle tends to cost more per mile than an average car: worse fuel economy, harder use, more expensive tyres and brakes, higher insurance, and faster wear from carrying weight and equipment.

So for a loaded service truck or a van full of stock, actual expenses often produce the larger deduction — sometimes substantially. A lighter vehicle covering long distances between jobs is more likely to favour mileage, because you are spreading a generous per-mile rate across a lot of miles.

The honest answer is that it depends on your vehicle and your mileage, which is exactly why it is worth calculating rather than assuming.

The trap nobody mentions

The choice is not always freely reversible.

There are rules about which method you may switch to and when, and they can depend on what you chose in the vehicle's first year and whether you claimed certain depreciation. Choosing casually in year one can lock you into the worse method for the life of the truck.

That is the single best reason to work it out properly at the start rather than letting a preparer default you into whichever is quicker.

What each method demands from you

Mileage needs a contemporaneous log: date, business purpose, and miles. Contemporaneous matters. A log reconstructed at year end from memory is the classic disallowed record, and "I drive about 25,000 business miles" is not a log.

Phone apps that log automatically have made this genuinely easy, and they remove the main reason people avoid the method.

Actual expenses needs every vehicle receipt kept and categorised, plus the mileage log anyway to establish the business-use percentage. More record keeping, potentially a larger deduction.

Multiple vehicles

If you run several, this becomes more interesting rather than more annoying. Methods can differ by vehicle, and the calculation is worth doing per truck rather than across the fleet.

There is a second payoff here. Tracking vehicle cost per truck for tax reasons produces exactly the data you need for profit per truck — one of the most useful operational numbers a multi-vehicle contractor can have. The same record keeping serves both purposes.

The personal use question

If the truck goes home with you and gets used at weekends, that portion is not business use. Ignoring it entirely is a common and unnecessary risk, since the business share is usually large enough that being honest about the rest costs very little.

What to do

Track miles from now on regardless — both methods need it, and starting is free. Then keep vehicle receipts for a few months so you have real numbers, and run the comparison properly rather than defaulting.

If you have several vehicles, do it per truck. The differences between a fifteen-year-old flatbed and a new van are large enough to matter.

Related

• What contractors can actually deduct
• Profit per truck
• Buy, lease or finance?

General information about how the two methods work, not tax advice. Rates, depreciation elections and switching rules change and depend on your circumstances — confirm with your CPA before choosing.