The miles you drive to build your business or complete work as a 1099 contractor could be your single biggest opportunity to reduce what you owe Uncle Sam when taxes come due. Like any hard working entrepreneur, you don’t want to be paying a dollar more to the government than you have to, but where do you start? Navigating tax law is always bewildering, even for the most seasoned business professionals. You might have plenty of questions about what qualifies as a business use of your vehicle, how you should keep track of those expenses, and how you can maximize your deductions to keep more of that hard-earned cash in your own pocket where it belongs. This article will guide you safely through the congestion, show you the best route, and get you to the bank.
Do you use your car exclusively for your 1099 contracting work? Or do you own a car that you sometimes drive for personal use and other times use to take trips for work? According to the IRS, “if you use your car only for business purposes, you may deduct its entire cost of operation… However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.”
So what qualifies as “business use” of your car? If you’re getting paid to drive, (for example as a driver for Uber, Grubhub, or Instacart) then those trips count. If you need to get somewhere to build your business, that’s another qualified business use. If you’re meeting a client or customer as real estate agent or other self-employed sales professional, then deduct the costs for that drive. If you are running to the store grab milk for the kids’ cereal because you worked too late yesterday, that one is personal and won’t increase your tax deductions.
So how much do you deduct for the 12 miles you drove across town and back to close your latest deal? Well, there are two routes you can take: The first is manually recording your miles or using a mileage tracking app keep track. The other is looking at the real cost of that trip, such as the price of the gas you used, the cost of oil changes, and the fact that your car is now worth slightly less than it was this morning. We’ll give you directions for choosing one of the two methods next.
Should I track miles or the true costs of my car ownership and use?
The general rule is that if you drive more than 20,000 miles per year in a fuel efficient vehicle you should consider tracking miles. For others, it’s less likely to be beneficial.
Before you get too far under the hood, you need to start with the question of whether to report the total miles you’ve driven or to keep track of each actual auto expense, including depreciation—the value your car loses each time you drive it. If this all sounds more technical than you want to handle, don’t despair. Even if you're new to self-employment, this question isn’t as complicated as it sounds at first. Once you know the difference in these two methods, there are great tools, like Keeper, that will do the hard part for you, so you can keep your eyes on the road.
Read also: “Should I claim mileage or actual car expenses?”
How do I track the cost of using my car?
Most people assume that tracking mileage is more simple than true driving costs. After all, you’re just adding up the number of miles, right? If you’re keeping track of all of this yourself, you might be right, but there are great tools out there, like Keeper, that will make your life a lot easier and save you money.
Making the miles count
First, let’s look at tracking total miles driven. With this approach, you record each trip you make for business and add up the total miles for the year. This number is then multiplied by what the IRS calls the “standard mileage rate” for business use of a vehicle. The idea is that this per mile rate is an approximation of the average cost of driving a car one mile. Beginning January 1, 2019, the IRS set the rate at 58 cents per mile. That’s a four and half cent increase from last year.
From a Hummer to a Fiat, the cost of driving a car varies widely, so the standard mileage rate might be a significant underestimate of your actual costs or, on the other hand, it might be quite generous.
Keeping a record of each place you drive might not sound that hard and it isn’t, but when you’re really focused on a client meeting or a project proposal, the last thing you want to do is stop to jot down numbers each time you get in and out of your car. There are apps out there that will use the GPS on your phone to track the mileage you drive for each trip. They make this process much easier because then all you have to do is categorize each trip as either personal or for business.
Thinking about all the different costs of owning and driving your car might conjure up images in your head of a garage piled with old shoeboxes, hand-labeled with a year in Sharpie and stuffed with receipts. Fortunately that is no longer the case. Technology comes to our rescue to make tedious paper record keeping mostly a thing of the past - so long as you have clear expense records (think online banking), it’s actually quite easy to tally up your actual expenses at the end of the year.
The IRS does require that you maintain records of the amount, time, place, and purpose of your expenses, but today you can ditch the dusty paper receipt bundles and let Keeper do it for you.
Keeper is not your father’s shoeboxes. It’s cruise control for your accounting. To track your car (or other business) expenses, you simply link a spending account to Keeper and let tax pros do the record keeping for you. It’s like having your own personal bookkeeper!
The old receipt method meant every time you filled up your tank or bought new tires, you would have to remember to get a receipt, find a place for it until you got back to your desk, manually add up all the totals, and then store that little bit of paper for years, just in case you were audited by the IRS.
Today, Keeper will have its eye on your spending and automatically identify your tax deductible expenses, compile them all together, and store them securely in the cloud, accessible from anywhere in the world. No shoebox can do that.
Unlike the old method, Keeper won’t forget a purchase or lose a receipt. You can be satisfied that you are savings as much of your income as possible and confident that you are fully prepared if you ever see lights of the tax police flashing in your rearview mirror.
What kinds of expenses are we talking about?
Odds are that there are more car-related expenses that you can deduct from your taxes than you might think. Many people look at the 58 cents per mile and think that has to be greater than the actual cost of driving their car for a mile.
Some quick math tells us that at 29 miles per gallon, a typical Toyota Camry consumes just over ten cents worth of gas to take you a mile with unleaded fuel priced around $3 a gallon. But don’t be fooled, gas is a much smaller part of the total cost of automotive transportation than most people realize.
The costs of traveling by car include fuel, oil changes, tires, filters, fluids, regular maintenance, unexpected repairs, insurance, registration, property taxes, parking fees, tolls, and more. It’s a long list and the totals add up quickly. For each expense, you need to record the amount it cost, when you spent it and where, and the business purpose.
Keeping track of your auto expenses can be exhausting and you can feel anxious always trying to stay in the lanes, especially as a new business owner or contractor. That’s why we built Keeper: to save you money and make your life as an entrepreneur easier so you don’t let tax law and record keeping drive you crazy.