As a ridesharer who drives for a service like Lyft or Uber, claiming tax deductions can make your tax return look a little less like roadkill and a little more like the King of the Road.
Rideshare drivers are considered to be self-employed, so they don’t have taxes withheld from their paychecks like traditional employees. Because of this, self-employed professionals are allowed to claim deductions for work-related expenses, which helps lower their tax burden.
When you’re ready to file, you’ll list the majority of your deductions in Part II of your Schedule C (Form 1040). If you have less than $5,000 in claims, you may be able to use Schedule C-EZ. Whichever you choose, both are due April 15 along with your annual tax return.
(NOTE: If April 15 falls on a weekend or holiday, it is observed the following Monday. In 2016, this means your taxes aren’t due until April 18. In Massachusetts and Maine, the delayed celebration of Patriot’s Day further moves the tax deadline to April 19.)
Car-Related Expenses (Line 9)
Because your main source of income is from driving, your most substantial tax deduction source will likely be your car. Whether you’re using your personal car or one purchased exclusively for ridesharing, you have to choose between two methods of deduction: the actual expenses method or the standard mileage method.
Here’s the difference between each choice.
Method 1: The Standard Mileage Rate
The standard mileage method lumps common expenses together for which you deduct a single rate per mile. This is by far the simplest method. You track your business mileage and then multiply the total number by the rate set by the IRS for that tax year ($0.575 per mile for 2015). This includes:
- Lease payments
- Maintenance and repairs (e.g. oil, tires, etc.)
- Vehicle registration
Since this rate includes all of these expenses, you cannot separately deduct them. Also, it should go without saying, but you can only deduct the business usage of your car. Here’s an example:
You own a car and drove a total of 18,000 miles (whew!) for the year. 11,000 of those miles were driven as a ridesharer. Because you can only deduct the business use of your car, you can only deduct the rate based on those 11,000 miles. That would be 11,000 x $0.575, which equals $6,325.00.
An important note: If you’ve used the actual costs method for this car in the previous year (see below), you are not allowed to switch back to the standard mileage method. There are also a few other cases where you cannot use it: For example, if you aren’t the owner or lessee of the car, or if you use five or more cars at the same time.
Method 2: The Actual Costs Method
In this method, you keep track of every individual cost you have related to your car. This includes gasoline, insurance, maintenance, depreciation, lease payments and more. This means you need to keep good records of all related receipts. Financial software like QuickBooks Self-Employed can also help keep track of these expenses and automatically classify them as deductions.
One thing you’ll also have to track is depreciation. Depreciation is when you apply portions of a single expense over a prolonged period of time. For example, say you buy a $10,000 car. Your car doesn’t provide all its value in the first year, because you’ll own it for longer than that. It provides you value for the entire time you have it, which means you’ll have to manually account for its depreciation.
The easiest way to calculate your depreciation for the year is using what is known as the “straight-line method.” This is the total cost divided by the number of years. So if you depreciate a $10,000 car over seven years (the maximum number of years the IRS has set for car depreciation), that’s $1,428 per year of depreciation expense. There are also other methods, like the 200% declining balance or 150% declining balance, but the IRS generally prefers the straight-line method.
Then there are requirements for weight and vehicle type. For 2015, assuming your car is used 100% of the time for business, the maximum allowable depreciation deduction for a new car is $3,160, with up to an additional $8,000 in “bonus depreciation.” For a used car, it’s only $3,160. Further restrictions apply to light trucks, vans and SUVs, which are limited to $3,460.
And one more note: Once you use the actual costs method, you will not be allowed to use the standard mileage method the following tax year.
Sound confusing? It can be. That’s why most people decide to use the standard mileage method.
Parking and Tolls (Part of Line 9)
In addition to either of the two methods above, you can expense parking fees and tolls that relate to business driving. For example, if you’re picking up a client and have to pay for parking while you wait for them to come down, you can deduct that parking expense. But if you’re taking a break for lunch, you cannot expense the parking, since it is not business-related.