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Standard Mileage vs. Actual Expenses: Getting the Biggest Tax Deduction

Updated for Tax Year 2016


OVERVIEW

The IRS offers two ways of calculating the cost of using your vehicle in your business: 1. The Actual Expenses method or 2. Standard Mileage method. Each method has its advantages and disadvantages, and they often produce vastly different results. Each year, you’ll want to calculate your expenses both ways and then choose the method that yields the larger deduction and greater tax benefit to you.


Actual Expenses vs. Standard Mileage Method

Man driving car

As an Uber driver, the business use of your car is probably your largest business expense. Taking this tax deduction is one of the best ways to reduce your taxable income and your tax burden.

This is doubly important because you are taxed twice on your ridesharing income—once for your income tax and once for your self-employment tax (the amount you contribute as a self-employed individual to Social Security and Medicare). Both taxes are based on the net profit of your business, which can be reduced by taking the deduction for business use of your car.

The IRS offers two ways of calculating the cost of using your vehicle in your business:

  1. The Actual Expenses method or
  2. Standard Mileage method

Each method has its advantages and disadvantages, and they often produce vastly different results. Actual Expenses might produce a larger tax deduction one year, and the Standard Mileage might produce a larger deduction the next.

If you want to use the standard mileage rate method, you must do so in the first year you use your car for business. In later years you can choose to switch back and forth between the methods from year to year without penalty. Each year, you’ll want to calculate your expenses both ways and then choose the method that yields the larger deduction and greater tax benefit to you.

Below you’ll find an easy-to-follow roadmap to choosing the best method for you, this year.

Two types of expenses

As a self-employed owner of a ridesharing business, you’ll report your business income as well as your business expenses on Schedule C. The chart below breaks your total business expenses into two main groups:

  1. Common operating expenses and
  2. Vehicle expenses

Common operating and vehicle expenses

Many of the items listed on the chart apply both to your business and to your personal use. For example, you might use the same phone and wireless plan for both your business and your personal life.

  • For tax purposes, you need to calculate the percentage of each expense that applies to your business and deduct only that portion from your business income.
  • The IRS can disallow any expenses that are not supported by receipts, mileage logs, and other documentation.

For this reason, many people use a single bank account or credit card for all their business transactions. That way they can refer to their monthly statements or online records to accurately track their business expenses.

The Actual Expenses method

As the name suggests, the Actual Expenses method requires you to add up all the money actually spent in the operation of your vehicle. You then multiply this figure by the percentage of the vehicle’s business use.

  • For example, if half the miles you drive are for business and half are for personal use, you will multiply your total vehicle expenses by 50% to arrive at the business portion (e.g. $9,500 total expenses x .50 business use = $4,750 business expenses).

Some of the costs you can include in your Actual Expenses are:

  • Lease payments
  • Auto insurance
  • Gasoline
  • Maintenance (such as oil changes, brake pad replacements, tire rotations)
  • New tire purchases
  • Title, licensing, and registration fees (not deductible in all states; check with TurboTax to see if this expense is deductible in your state)
  • Vehicle depreciation (use a depreciation table to calculate the amount, and then deduct only the portion that applies to the business use of your vehicle)

The Standard Mileage method

The Standard Mileage method is a much simpler way of calculating the business use of your car. It does not require you to track individual purchases and save receipts. Instead, you simply keep track of your mileage for the tax year. (Tip: Take a photo of your odometer on New Year’s Day and save it, so you can always see where your mileage stood at the beginning of the tax year.)

As with other tax deductions, you must determine the percentage of your mileage that applies to your business.

  • If half the miles you drive are for business and half are for personal use, you will multiply your total mileage by 50% to arrive at the business portion (e.g. 10,000 miles x .50 business use = 5,000 business miles).

Once you have determined your business mileage for the year, simply multiply that figure by the Standard Mileage rate.

  • For tax year 2016, the Standard Mileage rate is 54 cents per mile. Carrying through the example above: 5,000 business miles x $.54 standard rate = $2,700 Standard Mileage deduction.

Uber makes it easy to track the miles you drove with passengers in your car. Your year-end Uber Tax Summary includes the total of your “On-Trip” mileage. This is a good starting point for calculating your total business miles.

  • You can add to this figure the business miles you drove without passengers, picking them up or to a central location after dropping them off.
  • Remember to log only the miles driven for your business.
  • No matter how loudly that slice of pizza called your name, you cannot deduct the miles you drove to pick it up.

Since Uber does not keep track of the miles you drive without passengers, you’ll need to keep your own mileage log. It should include:

  1. the date you drove
  2. the starting and ending odometer readings
  3. a description of the business activity
  4. and the starting and ending times of each trip

If you don’t want to keep a log by hand, mileage and expense-tracking apps can help you keep an accurate tally of this all-important deduction.

When you use the Standard Mileage deduction, you can’t deduct individual expenses for your car. For example, if your transmission broke down and had to be replaced, you might be better off using the Actual Expense method to take advantage of this large expense. The only way to know for sure is to keep good records and to calculate your tax savings both ways.

Example #1: Part-time Uber driver

Part time Uber driver expenses

In this example, the Uber partner-driver drove 10,000 miles in 2016, and 5,000 of those miles were for business. The driver’s Actual Expenses included:

  • $1,000 gas
  • $1,500 insurance
  • $6,000 lease payments
  • $400 repairs
  • $100 oil
  • $500 car washes

These expenses total $9,500. Since the driver used the car for business purposes 50% of the time, the Actual Expenses deduction is $4,750 ($9,500 x .50 = $4,750).

Using these same figures to calculate the Standard Mileage deduction, the driver multiplies the business mileage (5,000 miles) by the standard mileage rate (54 cents per mile), for a Standard Mileage deduction of $2,700.

In this example, the Uber driver-partner is able to deduct $2,050 more by using the Actual Expenses method than by using the Standard Mileage method.

Example #2: Full-Time Uber driver-partner

Full time Uber driver expenses

In this example, the Uber partner-driver drove 40,000 miles in 2016, and 30,000 of those miles were for business. The driver’s Actual Expenses include:

  • $4,000 gas
  • $3,160 depreciation
  • $1,500 insurance
  • $1,200 repairs
  • $190 oil
  • $500 tires
  • $750 car washes

These expenses total $11,300. Since the Uber driver-partner used the vehicle for business 75% of the time, the Actual Expenses deduction is $8,475 ($11,300 x .75 = $8,475).

Using the Standard Method with these same numbers, the driver 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 example, the Uber driver-partner is able to deduct $7,725 more by using the Standard Mileage method than by using the Actual Expenses method.

As these examples show, the method you use to calculate the business use of your car can have a big impact on your total business expenses, your net income, and your tax burden. Keep complete records so you can calculate your deduction using both methods, and then choose the one that saves the most money for you.

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

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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