As you know already from the first 22 days, I'm all about the business mindset.
What could be more business mindsetty than keeping records for your business?
I heard that groan. Not sure if that's because of the mindsetty thing or just the thought of book keeping. I'm going to guess a little of both.
It's not all that bad. Really, it's not.
I'm going to break this down into two days. Today we'll cover what you can claim. Tomorrow we'll get into how to track it.
Your taxes are based on what's left over after expenses. When you file your taxes, you will list what you received and what you paid out.
To know what you paid out, you need to track it.
It doesn't have to be very complicated. You just write it down as it happens. Eventually you will put everything into categories so you or your tax pro can get it sent in.
But seriously, it's not all that bad, especially if you just stay on top of things.
For most of us, there's not all that much to track outside your car. That said, if you paid money for things for your business, you should keep track of that because it's less money you pay taxes on.
And that kind of thing is something we can all do pretty easily.
My Rule for What to Track:
If you think the money you spend is related to business, track it.
That's pretty much it.
Even if it's just jotting it down in a notebook or a spreadsheet, keep a record.
And keep the receipt.
Don't worry as much about if you can claim it on your taxes. Some things you can and some you can't. Track it. It's easier to track it and not end up claiming it on taxes than to find out you could have claimed it and then try to find the receipt.
Track it now, figure it out later.
Three questions to ask when deciding to track something.
Let me put that a better way. Like I said, if in doubt, track it. You can figure it out later.
But there are three questions you can ask that help you get a feel for if it's a legitimate expense. It kind of boils down to this one rule of thumb:
The rule of thumb for the IRS is that an item has to be ordinary, necessary and reasonable to run your business.
Here are some questions you can ask yourself:
Is this something I must have for my business?
You have to have a cell phone. There's no way around that one when our offers come over our cell phones. That means you have to have a data plan. You need some way to get around for your deliveries. This is the necessary
Will this increase my potential for profits?
This is the reasonable. Is this something that makes you better able to do what you do with your business? Your delivery bags may do that. A cell phone holder that makes it easier to use that necessary cell phone can do that.
Is this more for me or more for my business?
This can be a tough one to be honest about. If it's something you would get anyway or if it's something that is more for you personally, it may not fly as a business expense.
Here's an example. There are people out there who will tell you that your meals while you are delivering can be claimed. They're wrong. You would need that meal whether you were delivering or not. There's not a real business purpose to eating that meal. Just because it gives you energy to keep working, that's still more about the personal than about your business.
Let's be honest here. You know when you're really stretching to make a case for calling it an expense. If you have to stretch, it's probably not a real expense.
That said, right now if you think there's still a chance, go ahead and track it. Tracking it doesn't mean you're claiming it on taxes. It just means you have a record. You can always figure out later that no, you can't claim it.
But if you find out you CAN claim it, it's easier to do that if you already tracked it.
Track it now, figure it out later.
Here's a list of common expenses for delivery couriers.
This isn't everything. But as you go through this, it might help you get a better idea of what to track. Tomorrow we'll get more into what you do with it when you've tracked it.
On some of these expenses, the percent of use rule applies.
On some items that you use both personally and for your business, you can only claim the percentage of the cost that relates to your business use of the item.
If 80% of your use of the item is for business, you can claim 80% of the expense. If only half of the use is for business, you can only use half of the cost.
I'm not getting into a lot of detail here. You have a choice between the actual cost of using your car or the per mile rate (57.5¢ in 2020). It's pretty rare for it to be better to use the actual expense method. Gas, oil and maintenance, insurance, registration fees and depreciation (loss of value) all fall under auto expenses.
The percent of use rule applies, generally using mileage as your basis. If 80% of your miles are business related, you can claim 80% of the costs.
I do think you are wise to track your auto expenses even if you're claiming mileage. It's just good to know.
That said, I won't reference car expenses beyond this section, with a small few exceptions (because there are a couple of things you can still claim even if you claim your mileage).
Automobile Clubs / Safety Memberships
If the extent of your driving prompts you to get something like a AAA membership or an additional roadside assistance package, these are legitimate business expenses. These are not a necessary and ordinary part of operating your car, and thus you can claim them even when taking the standard mileage.
If you have fees related to a business bank account, those are deductible. (Hint, it's a really good practice to get a bank account solely for your business).
Instant pay transaction fees count as bank fees. I'll tell you not to use the instant pay features, it's silly in my mind to pay Doordash $1.99 a pop to get your own money. But if you do pay those fees, those are a business expense.
Bicycle, E-bike, Scooter or Motorcycle costs.
You cannot claim the per mile rate on any of these things. You can claim the actual cost of using these for your delivery business. That does mean you have to track everything related to them. Any parts, maintenance, insurance if applicable, improvements all count. So does depreciation or loss of value. The business use percent rule applies here.
Books and Audio Books that help you develop your business.
If you get books that help you figure out your taxes or give you ideas on how to run a business, those count. Books and Audio Books that help you develop as a business person. I have an Audible subscription that I use exclusively for business books.
If I had charged for this class, the cost of the class would be a legitimate business expense. Things like this that help you develop your ability to operate your business are legitimate business expenses.
Business Cards or Printed Materials for your business.
You wouldn't think business cards do you any good. A couple of years ago, Uber Eats customers could only tip after the delivery. If the customer rated me, the app would ask them to leave a tip. So I printed up thank you cards, and at the bottom of the thank you I asked them to let me know how I did. It was a way of asking people to tip without asking them to tip.
Any business or liability insurance you get would apply. This does not include car insurance (personal or commercial) or health insurance.
Car or Business Loan Interest.
If you have a car loan, you can claim a percentage of the interest on the loan, based on what percent you use your car for business. This is an allowable expense even if you take the mileage deduction. A number of contractors took out EIDL or PPL loans due to the pandemic, and any interest costs for that loan are deductible.
The principle on any of these loans cannot be claimed.
Cell Phone Costs.
Your cell phone is a necessary part of your business. Cell phone costs are generally based on the percentage of business use. Unfortunately there's not a clear standard for how you determine how much of your use is for business. It's not like miles on a car. Some people will use the same percent as they use with their car, others might claim 50% if they deliver part time (20-30 hours a week range).
The phone itself
If you own or make payments (non lease) on the phone, you can claim the business percent of the depreciation or loss of value of the phone. If you lease the phone, it's the business percent of the lease payment. Any repair costs are treated the same way.
Again, this is based on the business percent of use of the phone. If you're on a multi-phone plan, you want to figure out what portion of the bill (including taxes) is related to your phone, and then claim the percentage of that portion.
This one can often be the exception to the percent of use rule. That's because some accessories like phone holders or car chargers are things you wouldn't get if not for your business.
Candy, snacks, refreshments for customers
If you put together something like candy packets to give to customers as a thank you or to encourage better tips or ratings, 50% of the cost can be considered a business expense.
Here's where you have to remember the thing about the clothing being necessary, ordinary and reasonable. The IRS says that clothing is an expense if it's “exclusively for work and unsuitable for street wear.”
If your clothes are just normal clothes, where there's nothing to distinguish it from what you would wear outside of your business, you're not going to be able to claim them.
However, if you purchase branded clothing such as the Doordash or Grubhub shirts to set you apart for your delivery work, that's a reasonable business expense. The Independent Delivery Pro shirts that I'm giving out would be claimable if you purchased them.
Delivery bags and drink holders
Some apps provide the bags for free. Others, you're on your own. Sometimes it makes sense to purchase something larger bags that help your deliveries go smoother and faster. Delivery bags and cup holders are truly business expenses.
Fees you have to pay to gig companies
If you're delivering for Uber Eats (or Lyft or Uber) you might be claiming this one. Some gig companies will report higher payments to you than what were actually deposited in your bank.
For instance, Uber Eats may have reported that they paid you $1,000 when you only received $700. That's because they are reporting that your actual fees were $1,000, but they are also reporting that you paid them $300 in commission. If you report the $1,000 that they recorded as your income, then you could claim the $300 that you paid in commissions. While you never physically paid the money to them, on paper you did.
The bottom line is your net earnings are the same whether you report only the $700 income, or if you reported the $1,000 income and $300 expenses.
Legal and Tax Help
If you pay for anyone to help you with the business part of your taxes, or for legal and professional help, those costs are legitimate expenses.
Software or apps that help with your taxes or with keeping records are deductible.
Licenses and Fees
If you decide to form an LLC or other type of corporation, any fees related to that are business expenses. Some places may make you get a business license. If you need certain permits, all of that can be claimed.
Meals (extremely limited)
Meals while you deliver are NOT deductible. We talked about that up above.
However, you can claim 50% of meals that are business related. Those are rare in our industry. About the only example that I could think of that might apply is if you took a buddy out to dinner to try to talk them into signing up with your referral link. Because that dinner has a business purpose – the potential for increased earnings for you, that instance would be allowable.
You cannot use the claim that since you're in your car, it's considered a travel expense. The general rule is it's not considered a business trip if it's not an overnight trip requiring you to sleep over in another city.
Paid apps related to your business.
An example might be a GPS mileage tracking app. There are some specialized apps now to help you with efficiency.
Parking and tolls related to your business
Even when claiming the mileage deduction, if you have to pay for parking or for tolls related to your deliveries, you can claim 100% of those costs.
Property taxes on equipment for your business.
If you are charged property taxes on your car or motorcycle or anything you use for business, you can claim the business percent of those taxes.
Professional Development and Training.
I've heard several in this class make comments like this: I love the freedom that goes with this and I'm interested in taking the next steps to starting other types of businesses.
There are all sorts of opportunities where you can develop yourself further as a business owner. Training programs exist that can help you get to the next level. If anyone creates any type of membership or association where you can learn best practices from one another, any costs like that are legitimate business expenses.
This is not necessarily everything.
But it gives you an idea.
If you have to pay money to operate your business or to improve your business, that is a cost of doing business.
If you suspect that it might be a legitimate expense, track it.
Track it now. Figure it out later.
Tomorrow we'll talk about the ‘figure it out' part.