Car

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As with most decisions in life, taxes should only be one of the considerations of owning v. renting - and especially when it comes to vehicles.

Here are a few of the non-tax considerations on buying or leasing a business vehicle:

1. Number of miles your drive each year: leased cars often charged extra fees for miles driven over 10,000 or 12,000/year.
2. How long you keep a car: do you get a new car every 3-4 years or keep it until its junk?
3. How much do you want to spend on your monthly payments: lease payments are usually quite a bit less than monthly payments on car loan.

Now let’s talk about the tax benefits for the self-employed taxpayer and his or her car used for business. With both purchased and leased cars, you can deduct the related expenses by using the standard mileage rate or actual expenses. 

Note: If you own the vehicle, you can choose the standard mileage rate in the first year and switch to the actual expense method in a later year if it becomes more favorable.

On the other hand, and if you lease a vehicle, you may also choose the standard mileage rate in the first year, but once you use the standard mileage rate you must use it for the life of the lease.

With the standard mileage rate, your business mile deduction will be based on 56 cents per mile for 2021.

You can also deduct business-related parking fees and tolls. For the purchased vehicle, you may also be able to deduct a portion of the interest on your car loan.

Under the actual expense rules, for both leased and purchased vehicles, you can deduct the business percentage of your gasoline, oil, insurance, garage rent, parking & registration fees, lease or rental fees, repairs, tires, loan interest, etc.

Purchased vs. Leased Vehicle Expenses

Some expenses differ between purchased and leased vehicles using the actual expense rules, and because you don’t own a leased vehicle, you can’t depreciate it.

However, you can deduct the business percentage of your lease payments. So if your yearly lease payment is $4,200 ($350/month) and your business use percentage is 80%, you may be able to deduct $3,360 on your tax return for that year.

There is one hitch: since the tax code limits the depreciation on “luxury” cars, it also limits (to a very small degree) lease payments on such a car. It’s called a “lease inclusion amount” and it reduces the deductible lease payments. The higher the original value of the car, the greater the amount.

As the price goes up on the car, leasing usually becomes more preferable.

But don’t forget if you purchased the vehicle, you can also deduct the interest on the vehicle’s loan based on the percentage of business use.

If you purchased a car this year to transport passengers for self-employment jobs like Uber and Lyft (i.e. ride-sharing companies) - and you bought a sports utility vehicle, you may be able to deduct up to $25,000 of the cost of the vehicle if you use it more than 50% for your business.

If you purchased a car for your business you may also be able to deduct up to the depreciation deduction allowed if your business use is more than 50%.

There is one more difference between buying and leasing a business vehicle, which is the disposition of the vehicle.

When you dispose of a business vehicle that you own, there may be a taxable gain or deductible loss.  The portion of any gain that is due to depreciation will be taxed as ordinary income.  When you return your leased car to the dealer, there is no taxable gain or loss.

Don’t worry about knowing the tax laws related to business use of your car. 

TurboTax Self-Employed will ask you simple questions about your business and give you the tax deductions you are eligible for. If you still have questions, you can

Some driver-partners for the ride-share companies - receive two (2)  Form 1099s:

• Form 1099-K reports the total amount your passengers paid for the rides you provided.  This includes all the money you collected from passengers, including the Uber commission and other fees.  As a result, the amount shown on Box 1a of the form is greater than the amount you actually received.  However, you can usually deduct the additional fees as business expenses, so you pay taxes only on what you earned.
• Form 1099-NEC (1099-MISC in prior years) provides an accounting for any other income you’re paid, including referrals and non-driving-related bonuses.

The IRS rules do not require the ride-share company to issue a 1099-K if you processed fewer than 200 transactions or earned $20,000 or less in payments.

Likewise, the ride-share company is not required to provide a 1099-NEC  - if your non-driving income was less than $600.

Even if you do not receive a 1099 from the ride-share company, you are still required to report your ridesharing income to the IRS.  (Also - we ask that you check your online portal with the ride-share company that you created to do the driving - as the  1099s for the tax year are most likely in the messages, notifications, alerts and/or other communications from the ride-share company in the online portal).

Using Schedule C

You will most likely report the income from your 1099s on Schedule C, Profit or Loss from Business.

Since the ride-share company reports this income information directly to the IRS, you do not have to include the actual 1099 forms with your tax return.

Schedule C can also be used to list your business-related expenses.

• When you subtract your business expenses from your income, you will enter the difference—known as the business income or loss—on line 3 of Schedule 1 for Form 1040.
• This income amount is also used on Schedule SE, in calculating your self-employment taxes (for Medicare and Social Security).

To get you off to a good start with your business tax deductions, the ride-share company provides you with a tax summary that breaks down the totals of both your 1099-K and 1099-NEC.

The tax summary shows the total amount your passengers paid for booking fees as well as other fees, such as tolls, other booking-related fees, and split fare fees.

You can list these fees as business expense deductions on Schedule C so you do not end up pay taxes on the qualified business expenses that you incurred during the tax year.

Deductions for mileage and the business use of your car

The tax summary (most likely located on your online portal) includes the total online miles includes all the miles you drove waiting for a trip, en-route to a rider, and on a trip.

You can claim any other business-related mileage, such as the mileage you drove to ride requests, the mileage you drove after dropping off the passengers if you're waiting for another ride, and the mileage you drove before rides were canceled.

However, you must keep careful records of your off-trip mileage.

There are two ways to calculate the business use of your car:

• You can deduct the actual expenses of operating the vehicle, including gasoline, oil, insurance, car registration, repairs, maintenance, and depreciation or lease payments.
• Or you can use the standard IRS mileage deduction. For the 2021 tax year, that rate is 56 cents/mile of business use.

The standard IRS mileage deduction usually produces the higher deduction, and it’s definitely the easiest option. You simply multiply your total business miles by the IRS rate. Example:

• You drove 10,000 miles.
• Your expense equals $5,600 (10,000 X $ 0.56 = $5,600).

If you use the same vehicle for both your ridesharing business and your personal transportation, you must keep accurate records to separate the two uses.

You are allowed to deduct only the expenses that apply to the business use of your car.

The IRS can disallow any business expenses you can't support with mileage logs, receipts, or other documentation.

Deductions for mobile phone expenses

Your smartphone is essential to your business, so naturally its expenses are deductible. This can include:

• The cost of the phone itself
• The billing charges of your carrier
• And any accessories that are essential to your business, such as chargers, mounts, and cradles

As with your car, you're only allowed to deduct the portion of your smartphone expenses that are related to your business use.

For that reason, many ride-share driver-partners purchase a new phone and dedicate it solely to their business.

That way, 100% of all costs associated with that phone are deductible from their taxes.

More tax deductions for ride-share driver-partners

Almost anything you spend on your ridesharing business will qualify as a tax-deductible business expense.

This includes the business use of your car and mobile phone, but it can also include:

• Bottled water, snacks and amenities for customers
• Business taxes and licenses
• City and airport fees
• Freeway, highway, and bridge tolls
• Electronic toll transponder
• Floor mats
• Car tool kit
• First aid kit
• Tire inflator and pressure gauge
• Portable battery jump pack
• Flashlights and flares
• Roadside assistance plans
• Office supplies

Remember, with TurboTax Self Employed, we’ll ask you simple questions and fill out all the right forms for you to maximize your tax deductions.

Since the ride share company does not offer tax advice.  Please refer to TurboTax for additional information.

Remember, with TurboTax Live!, we'll ask you simple questions about your vehicles - and help you fill out all the right tax forms.

Whether you have a simple or complex tax situation, we've got you covered.

At TurboTax Live! we want you to feel comfortable and confident doing your own taxes.

We thank you again for your question, and hope that this helps you with options and suggestions for your tax return filings!!!