Note:
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 road map to choosing the best method for you, this year.
Two types of expenses
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
If you drive for a company such as Uber, 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 have to pay two separate taxes 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 a deduction for the use of your car for your business.
The IRS offers two ways of calculating the cost of using your vehicle in your business:
- The Actual Expenses method or
- 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.
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 road map 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:
- Common operating expenses and
- Vehicle expenses
Keep Complete Records
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.
