As you may know, the IRS lets you choose between actual expenses and the standard mileage allowance when claiming car expenses as a gig worker.
It's one or the other. You can't do both.
However, there are three exceptions you may be unaware of. We'll examine three car-related expenses and why you can claim them even if you take the mileage rate. The IRS lays it out for us:
If you are self-employed, you can also deduct the business part of Interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.IRS Publication 535, as of September 2022: Business use of your car
We'll look at each of these and how to claim them.
About this article
The purpose of this article is to explain how to claim interest, property taxes, and business-related parking and tolls as a gig worker. It's also one of several articles in a series about delivery driver taxes. We'll link to other articles where appropriate, and you can view the entire list of posts here.
This website focuses on running your business as a gig economy independent contractor, especially in the delivery sector. Many examples will relate to delivering for delivery companies such as Doordash, Instacart, Uber Eats, and Grubhub, to name a few. However, the concepts here relate to most forms of self-employment.
Understand that this is about independent contractor taxes in the United States. Other nations have their own tax regulations and may do things differently. You should seek a tax professional to help you with your local and national tax situation.
This is not tax advice. The purpose is to educate and explain how U.S. taxes work for independent contractors. If you need advice related to your particular tax situation, you should seek a tax expert who can guide you individually.
Claiming automobile loan interest
Yes. You can claim the business portion of the interest on your car loan if you use that car for business purposes. Whether you claim the standard mileage allowance or take the standard deduction is true, you can do this.
Just like determining how much of your actual car expenses you can claim, determine the percentage of your driving was for business.
For example, if you put 25,000 miles on your car and 15,000 of those were for business, your business percentage is 60%. In that case, you could claim 60% of the interest paid on your car loan.
Your loan provider should give you a statement that details your total interest for the previous year. Multiply that by your business percentage, and enter that on line 16b (Interest: Other) of form Schedule C.
Why isn't this part of the actual expense calculation? Why can you claim interest but can't claim fuel or maintenance when you take the standard mileage deduction?
This is because the actual expense method intends to calculate the cost of having and operating your car. Fuel, repair, maintenance, insurance, and depreciation are part of using your vehicle regardless of whether you finance it or own the car outright.
However, the cost of obtaining equipment for your business is tax deductible and separate from the cost of the equipment itself. That rule applies to your car loan as well.
Rules about claiming interest do not apply to leased vehicles because a lease is not a loan. The good news is that you can write off the business portion of the entire lease payment. The bad news is that you can't claim any of the lease payment if you claim mileage.
Claiming personal property tax for your car
It seems curious that property tax is usually part of the registration process. The IRS considers licensing and registration fees to be part of the actual cost of your car. And yet, they say you can deduct the business portion of property taxes “whether or not you claim the standard mileage rate.”
Why the discrepancy?
Like interest, property tax is an expensable item separate from the operating cost.
If you own a building or other equipment for your business subject to property tax, you can write off those property taxes. It would only be consistent to allow you to do that with your vehicle.
Like you do with car interest, you calculate the business percentage of property taxes paid on your vehicle.
Property tax is also a personal tax deduction if you itemize. You can not take it both as a personal tax deduction AND a business expense. However, you can split it between the two. You can claim the business percentage on line 23 of Schedule C (Taxes and licenses) and the remainder on your itemized tax deductions.
Why wouldn't you just write it off on your personal deductions? Doesn't it all work the same?
Actually, it doesn't.
Claiming it as a business expense reduces your business income, meaning it reduces both self-employment and income tax. If you take it as a personal deduction, you're only decreasing income for income tax purposes.
Business-related parking and tolls
Parking and tolls are included in the IRS list of items used to calculate actual car expenses. If you take the mileage deduction, you can't claim items on that list.
And yet the IRS \says, “In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls.”
Isn't that a contradiction? Why does one rule seem like you can't claim them, but another explicitly says you can?
The difference lies in WHICH parking and toll fees you claim. You can claim the fees directly related to a business trip, such as those incurred while en route to a delivery, or while parked to pick up or drop off items. If you're not in the gig economy, parking fees while visiting a client would be deductible.
Parking and toll costs paid as part of your day-to-day driving or during a commute can be included in the actual expense method. Those particular fees could NOT be claimed when taking the standard mileage rate.
Such fees related to a business trip can be claimed at 100%. You do not need to calculate the business portion of these costs.
These costs are added to your total vehicle deduction. You would either multiply business miles by the mileage rate, or add up all vehicle costs and calculate the business percentage of that total. Add your parking and tolls to whichever total you choose, and insert that total on line 8 of Schedule C (Car and truck expenses).
Wrapping it up
There's a lot of lousy tax information out there, especially on social media. Some will tell you that you can't claim any business expenses at all (not even non-car expenses) if you claim the mileage rate. Others advise you to claim car costs on top of mileage.
Listening to the wrong people can cost you a lot in unnecessary tax payments, or it can get you in trouble for claiming things you're not allowed to claim.
Don't rely on social media for tax advice. In fact, don't use anything on this site as tax advice. My purpose is to explain, not provide tax advice. This is why I'll point you to what the IRS says about a topic.
Ultimately, rules about how to claim your car expense can be confusing. This is why it's crucial that you get guidance from a tax professional who can help you with your personal tax situation.
Many of us in the gig economy drive hundreds or thousands of miles for our work as independent contractors. That adds up to a substantial tax write-off. For that reason, you must understand the things you can claim.
Included in that list are your business-related parking and tolls and the business portion of car interest and property taxes.
The Delivery Driver Tax Series
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?