Tax Tuesdays
Tax Deductions for Cars in your Freelance Operation
If you are using your personal car in your side hustle or freelance position, you can probably take a deduction
Most of the freelance work we talk about on Medium involves sitting at a computer and typing stuff.
When most people in the media talk freelance, they mean getting in your car and driving. They mean Uber, Instacart, Grub Hub. That kind of stuff.
We’re going to focus on the latter here, though it’ll cover driving for your self employed work of any kind.
And unless you’re doing tons of work with your car, you’re going to be using the same vehicle for both business and personal uses.
So how do you divide your car expenses between business and personal. Does Solomon have to split your Honda in half?
Fortunately, no swords required. Any splitting is only metaphorical.
There’s a few different ways that you can handle the business half of your car. There’s an easy way, and there’s the hard way.
The Easy Way to Expense Your Personal Car
The most straight forward way to handle your business portion of your personal car is to track the amount of miles that are related to work then figure out the expense on a per mile method.
Fortunately, the IRS has done the cost per mile calculation for you. Will it be exactly what you spend for lease/car payments, insurance, gas, wear and tear, etc.? No, probably not. Definitely not if you‘re using the Maserati. But it will be close enough for most people.
A quick Google search will get you the IRS’s current year’s per mileage rate.
So let’s say you drive 20 miles in your personal car to a networking event for your business. If it’s the year 2021, you would multiply 20 by the per mile rate, which the IRS says is 56 cents per mile.
20 x .56= $11.20 expense reported as part of your Schedule C.
That’s about it. Though you do need to make sure you track those miles for when the IRS comes knocking. You don’t need to do an odometer readings every time you jump in the car, but a Google Maps proof of Point A and Point B should get you enough support.
WHAT THIS DOESN’T COVER: The mileage method is meant to cover all the normal expenses for your car, including insurance, wear and tear, maintenance, and gasoline. It DOESN’T cover parking and tolls. So if you have to take E-470 (Denver folk) or some other toll road, that’s separately deductible (confusingly, on the same line for the Schedule C). If you have to pay for parking when you get there, that’s also separately deductible.
The Hard Way to Track Those Vehicle Expenses
If you really want to, you can track all your expenses related to your car. You can then allocate those expenses pro rata between personal and business.
How are you supposed to allocate them? By an allocation of miles. So either method is going to require your driving miles to be tracked. This way, though, you also have to track all your PERSONAL miles to give you a ratio.
What’s more, this method will screw you over if you use the vehicle for less than 50% business. Then you can’t take any depreciation.
What’s depreciation? Don’t worry about it.
(If you really want to know, we’ll talk about it on another Tax Tuesday)
The worst part of doing the hard way is you’re unlikely to get a better answer unless your vehicle is used virtually all the time for business purposes.
In other words, unless you have a dedicated side hustle car, use the Easy Way.
Also, lest you think this will allow you to deduct more for that Maserati we mentioned above, it won’t. That expensive car likely won’t be considered an ordinary and necessary expense, so the deduction would likely be limited.
The Problem — Tracking the Cash
One potential problem with all of this from a bookkeeping standpoint is how you track the actual cash business expense of your car. Ideally your business expenses come out of a business account. With this kind of splitting, how do you do that?
Well, you could write a check from your business account to your personal account for the amount of miles times the IRS mileage rate. That would do it.
Most people I know don’t bother, though. They pay for 100% of the car from their personal account, then report the expense on their tax return, thankful for the extra deduction.
Which method you use is up to you.
Final Thought: What Are Business Miles?
Quite a few people will ask what to include in their business miles.
The short answer: basically anything necessary to run your business.
Not commuting, though. Commuting isn’t considered a business expense, it’s just part of daily life if you work out of your home.
Obviously, if your commute is from your bedroom to your downstairs office, this wouldn’t be a concern anyway.
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