For those of us using our cars for delivery for Doordash, Postmates, Uber Eats, Grubhub and others, your car expenses are usually the largest expense item on your taxes.
It costs a lot to operate your car. Every mile is expensive. If you're not tracking those expenses, it's even more expensive because you pay extra in taxes.
At the same time, there's a nice little bonus for delivery drivers. Most of us get to claim more for using our car that what it actually costs to use. The IRS mileage allowance is higher than the usual actual cost.
When we drive as much as we do, that's a nice bonus. But only if you're paying attention.
Undertanding the either or of miles verses actual expenses.
You get a choice.
You can add up what it actually costs to use your car and claim that as an expense for your delivery business. Or you can claim the standard mileage allowance (57.5¢ per mile in 2020).
It's up to you which one works best.
In a future article, we'll talk a bit more about what to track for actual vehicle expenses. I'll almost guarantee that the per mile deduction will be higher. However, I think it's wise to track both.
There's a well defined list of things that the tax code says are part of the cost of the car. You have to track all of those, keep all your gas receipts, keep all your records. And then you get into some complicated stuff like depreciation.
And then you can claim the business percent of those actual expenses. For example, if you drove your car 10,000 miles for the year and 6,000 of those miles were for business, 60% is your business percent. That means you can claim 60% of the actual cost of the car.
Or you can choose a flat per mile rate.
In the example above with 6,000 out of 10,000 miles being for your delivery business, you could add up all those expenses and do the math on the business percent. Or you could multiply 6,000 times 57.5 cents (for 2020) and get $3,450.
But it's a choice. It's actual expenses or it's the mileage rate. You can't do both.
The MOST Important Rule for Claiming Miles:
You HAVE to track your miles. You have to have a record.
If you claim the actual expense, you need the mileage record to know what your business percent is. You can't just estimate. A record is necessary.
If you decide on the per mile rate, you have to have a record.
The IRS requires a WRITTEN record either way of these four things:
- Date of the business trip
- Number of miles driven
- Where you went
- Business purpose of the trip.
Actual expenses or mileage rate. You have to track your miles.
Which is better: Standard Mileage Deduction or Actual Expense?
It depends. Which is going to save you more in taxes?
Usually, the standard mileage rate is going to add up to a bigger deduction.
If your car is more valuable, the actual expense method could be higher. In high mileage situations like ours, that becomes more rare because some costs are the same whether you drive 5,000 miles or 50,000.
In other words, your insurance, depreciation, registration and such cost less per mile when you drive more miles. As many miles as we drive, that almost always means we can claim more with the per mile rate.
Either way, it's wise to track both. Decide what's better.
It's good to actually track your miles because it's good to know what your actual profits are. If you want to really take the business of being an independent contractor serious, you should know what it actually costs to drive.
It's more than you think.
Track both actual expenses and miles. Run the numbers and choose.
Going into more detail on the car deduction.
Coming up, we've got several articles related to your car:
- Which miles should you track?
- What is the best way to track your miles?
- What if you forgot to track your miles?
- How do you calculate the actual expenses?
- Three surprise car expenses you can claim even when taking the mileage deduction.
I know, that's a lot of articles. I thought about writing one big article. But it would be big.
I know a lot of people have questions about each one of those topics. If they had to wade through one really large article, they probably won't do it. That's why I broke it down into five articles.
The thing is, for most of us, the car is such a big part of our expenses and such a crucial part of keeping our taxes down, it's important to understand that particular deduction.
It's so big that when I talk about figuring out how much to save for taxes I suggest doing a quick estimate of your profits. You can get a pretty good idea of your overall expenses by just calculating your business miles. Everything else is pretty small compared to it.
Recap: You can choose between actual expenses or the per mile rate. We'll talk about both in upcoming articles. The important thing is that knowing your car expenses can mean hundreds or thousands of dollars less on your taxes, depending on how much you drive.
Understand how to capture that vehicle expense. Keep your money.
Tax Guide: Understanding Your Income
The following three articles help you understand what your real income is as an independent contractor.
Tax Guide: Understanding Your Expenses
The following eight articles help you understand the expenses you can claim on your Schedule C. Most of these are about your car, your biggest expense.
Filling Out Your Tax Forms
Once you understand your income and expenses, what do you do with them? Where does all this information go when you start filling out your taxes?