If you have a job that requires you to travel a lot by car, you should be deducting your business expenses to prevent overpaying your taxes. These expenses include both “common operating expenses” for the self-employed as well as vehicle expenses—which can be a great way to lower your tax burden.
To deduct the costs associated with the use of your vehicle, you can use either the Standard Mileage method or Actual Expenses method. You won’t be able to take both deductions, so you need to evaluate which method provides the bigger tax benefit for you. To help with the decision, we’ve outlined the basics of each method and highlighted two examples that illustrate the differences among each.
The simplest method for calculating your vehicle-related deductions is to use the standard mileage deduction. For tax year 2016, this is $0.54 per mile. In 2017 it will be $0.535 per mile.
You are eligible to count any miles you drive for business-related purposes. For example, if you drive for Uber of Lyft, you can deduct any miles related to your ridesharing services, including the miles you drive looking for passengers to pick up (even if there are no passengers in your car). However, if you run personal errands in between taking customers, you can’t deduct that mileage.
In order to claim this deduction, you need to keep a detailed mileage log. Your mileage log should include the date, start time and end time, the activity involved, and the beginning and ending odometer readings. Mileage and expense-tracking tools can help you maximize this mileage amount because they are the most comprehensive.
Choosing the Standard Mileage deduction means that you cannot deduct any other expenses related to your car. If you’d prefer to deduct other items, you need to use the Actual Expenses method.
When deducting actual expenses, you can only deduct the portion associated with your self-employed work (e.g. if half of your $100 cell-phone bill is used for work, deduct only $50).
Here are some of the items you can include in your deduction:
- A portion of your lease payment (if you are leasing your vehicle)
- Auto loan interest (if you’re financing the purchase of your vehicle)
- Auto Insurance
- Maintenance and Repairs (like oil changes, new tires, replacing brake pads, etc.)
- Depreciation: When you use the Actual Expenses method, you can use a depreciation table to deduct a portion of this on your taxes. Just make sure the deduction is in proportion to your business driving time.
- Registration: You can’t deduct your title, licensing and registration fees in all states. However, if your car registration cost is based on a particular formula, you might be able to deduct a portion of the cost. Check with a knowledgeable tax professional to determine whether this is an option for you.
Remember to save all of your receipts and keep good records so that you have the information you need to make a decision.
Example: Part-Time Rideshare Driver
Assume you drove 10,000 miles in the year 2016, and 5,000 of those miles were for business. Here’s how you would break down your deductions using the Actual Expenses method:
- Gas: $1,000
- Insurance: $1,500
- Repairs: $400
- Lease Payments: $6,000
- Oil: $100
- Washes: $500
These figures total to $9,500 in car-related expenses. Since you used your car for business purposes 50% of the time, you would multiply your total expenses by 50% to get your actual deduction, which comes out to $4,750.
If you use these same figures to calculate your deductions using the Standard Mileage method, you would multiply your business mileage (5,000 miles) by the standard mileage rate (54 cents per mile), which comes out to $2,700.
As you can see, in this example, you’ll save the most on taxes by using the Actual Expenses method for the deduction.
Example: Full-Time Rideshare Driver
Now, assume you drove 40,000 miles in the year 2016, and 30,000 of those miles were for business. Here’s how the Actual Expenses method would work in this instance:
- Gas: $4,000
- Depreciation: $3,160
- Insurance: $1,500
- Repairs: $1,200
- Oil: $190
- Tires: $500
- Washes: $750If you add these up, your total expenses come out to $11,300. Since you used your car for business 75% of the time, you would multiply your total expenses by 75% to get your actual deduction, which comes out to $8,475.
If you use the Standard Method with these same numbers, you would multiply the number of miles driven for business (30,000) by the standard mileage rate (54 cents per mile), which comes out to $16,200.
In this particular example, you’ll save the most on taxes by using the Standard Mileage method.
As you can see, the method you choose to calculate your car-related expenses can translate to either saving on taxes or adding to your tax burden. Accounting software like QuickBooks Self-Employed can help you keep track of mileage, automate your deductions and calculate both methods, allowing you to decide which method works best for you. And an accountant can also help if you’re having trouble with the decision. For more tax-time tips, see our complete guide to taxes for the self-employed, as well as our guide to deductions and expenses.
This article is intended to provide you with general information; it does not constitute any type of tax advice. The views expressed in this article are those of the author alone, and do not represent the opinions of Lyft, Uber or any employee thereof. For recommendations related to your overall financial and tax status, contact Hampton Roads Accounting today.