Intuit Academy Tax Practice Exam

What is the correct deduction method for vehicle expenses by a self-employed individual?

1. Full vehicle cost depreciation

2. Standard mileage rate or actual expenses

3. Only insurance costs incurred

4. Fuel costs only

The correct answer is: Standard mileage rate or actual expenses

A self-employed individual can deduct vehicle expenses using two primary methods: the standard mileage rate or actual expenses. The standard mileage rate is a simplified way to calculate deduction based on the miles driven for business purposes, which includes certain fixed and variable costs associated with operating a vehicle, such as depreciation, maintenance, repairs, gas, oil, insurance, and vehicle registration fees, all factored into a per-mile rate determined by the IRS. Alternatively, the actual expense method allows for a detailed accounting of all vehicle-related costs, which might include gas, repairs, tires, oil changes, insurance, registration fees, and depreciation. The choice between these methods typically depends on the amount of business use of the vehicle and the total costs associated with its operation. The other options are more limited in their scope. Full vehicle cost depreciation does not cover the other relevant expenses that might be deducted. Only focusing on insurance or fuel costs ignores a host of other deductible expenses related to vehicle usage for business purposes. Therefore, the most comprehensive and flexible deduction approach is utilizing either the standard mileage rate or the actual expenses incurred, making the available choices aligned with IRS guidelines for self-employed individuals.