You may have some part-time or full-time Uber/Lyft drivers and traditional truck drivers as clients. These drivers must keep track of their miles, in order to deduct business vehicle expenses, which can seriously lower their tax burden. Depending on what type of driver they are, there are various ways to use the mileage log and the IRS’s self-employed mileage deduction to their advantage.
This provides a teachable moment for the tax professional to pass along some tax advice to their clients, so that they don’t miss out on important deductions and perform the proper recordkeeping throughout the year. You may consider talking to your clients about this topic, or sending out the information to bolster your value as their trusted tax advisor.
Choose a Method
First, you need to decide which deduction method to use. The IRS gives you two options: the Standard Mileage Rate Method and the Actual Expenses Method. You won’t be able to take both deductions, so you need to evaluate which will bring you the biggest benefit.
The Standard Mileage Rate Method is the simplest method for calculating your vehicle-related deductions. For the 2016 tax year, the rate is 54 cents per business mile. (It changed to 53.5 cents for 2017). That means that if you drove 10,000 business miles in 2016, your tax deduction would be $5,400. If you drove 30,000 business miles, your tax deduction would be $16,200.
To claim this deduction, you need to keep a detailed mileage log that includes dates, start times and end times, the activities involved, and the beginning and ending odometer readings. With the help of a mileage and expense-tracking app, such as the one offered within QuickBooks® Self-Employed, you can do this automatically and integrate it with your other deduction tracking. The app also allows for easy categorization, based on business or personal trips, and won’t drain your smartphone battery.
The Actual Expenses Method allows you to deduct your vehicle’s actual expenses. Eligible expenses include:
- Lease payments
- Registration fees
- Garage rent
- Parking fees
This method also requires a detailed log. Using this method, you can only deduct the portion of the costs that are associated with your self-employed work. For example, if your total actual vehicle expenses for 2016 are $3,000, and you used the vehicle 75 percent of the time for business (3,000 x .75), the allowable deduction would be $2,250.
Calculate the Costs
Unfortunately, there is no easy way to select the best method for you without calculating both. But, there are a few general guidelines that can help you understand where you may match up.
If you drive less than 10,000 miles a year, the Actual Expenses Method may be right for you. In general, some vehicle expenses, such as depreciation, insurance and interest, are pretty much fixed costs.
For example, say your fixed costs for the year amount to $4,800 and you drove 2,000 miles (all for business), here’s the calculation:
- Standard Deduction: 2,000 x .54 = $1,080
- Actual Expenses Deduction: $4,800
If you drove a bit more – say 8,000 miles (all for business) – your numbers would look a little different, though the actual expense method would still be in your favor. Take a look:
- Standard Deduction: 8,000 x .54 = $4,320
- Actual Expenses Deduction: $4,800
In both situations, you’re better off using the actual expenses deduction. For part-time rideshare or delivery drivers, this may be the right method for you.
If you have an inexpensive car that gets great gas mileage, you may be better off with the Standard Mileage Method. For example, if you drove 30,000 business miles in 2016, your standard mileage deduction would be $16,200, which is likely far greater than what it would cost you in actual expenses to keep the car running.
The standard deduction may be the most favorable deduction method for full-time rideshare or truck drivers.