Small business deduction, ex Uber

[Letty7]

Hi, is vehicle insurance allowed as an expense if vehicle is used for personal and business use?

Also, can the vehicle be depreciated for tax purposes?   

[AmitaR]

You're asking excellent questions about vehicle deductions for mixed personal and business use, especially relevant for gig workers like Uber drivers. Here's a breakdown:

Is vehicle insurance allowed as an expense if the vehicle is used for personal and business use?

Yes, absolutely! If you use your vehicle for both business and personal purposes, you can deduct the business-use portion of your vehicle insurance premiums.

Here's how it generally works:

1. Determine your business-use percentage: This is crucial. You need to accurately track your mileage for both business and personal use. For example, if you drive 20,000 miles in a year, and 15,000 of those miles are for your Uber gig (picking up passengers, driving between fares, etc.), then your business-use percentage is 75% (15,000 / 20,000).

2. Apply the percentage: You would then multiply your total annual vehicle insurance cost by that business-use percentage. So, if your annual insurance premium is $1,200 and your business use is 75%, you can deduct $900 ($1,200 x 0.75).

Important Note: This deduction applies if you choose the "actual expense" method for your vehicle expenses. If you opt for the "standard mileage rate" (which is generally simpler), insurance is already included in that per-mile rate, so you cannot deduct it separately.

Can the vehicle be depreciated for tax purposes?

Yes, if you own the vehicle and use the "actual expense" method, you can depreciate it for tax purposes. Depreciation allows you to recover the cost of your vehicle over a period of years, reflecting its wear and tear and loss of value due to business use.

Here's what to consider for depreciation:

• Actual Expense Method Only: Depreciation is part of the "actual expense" method. If you choose the standard mileage rate, depreciation is already factored into that rate.

• Business Use Requirement: To depreciate a vehicle, it must be used for business purposes at least 50% of the time. If your business use is less than 50%, you must use the slower "straight-line" depreciation method.

• Calculating Depreciation:

  • You'll need the vehicle's "basis" (its purchase price plus certain fees and taxes).

  • You'll apply your business-use percentage to this basis.

  • The IRS has specific depreciation rules and limits (often referred to as "luxury auto" limits, even for non-luxury vehicles) based on the year the vehicle was placed in service and its gross vehicle weight rating (GVWR).

  • You'll typically use IRS Form 4562, "Depreciation and Amortization," to calculate and report your depreciation.

  • Vehicles are generally classified as "five-year property" for depreciation purposes, meaning the cost is recovered over six calendar years (due to a half-year convention in the first and last year).

• Section 179 Deduction and Bonus Depreciation: These can allow you to deduct a significant portion (or even the full cost, for heavier vehicles) of the vehicle's cost in the first year it's placed in service, provided certain conditions are met (like the 50% business use for Section 179). These are complex rules, and consulting a tax professional is highly recommended to determine eligibility and maximize these deductions.

• Recapture: Be aware that if your business use drops below 50% in later years after taking special depreciation, you may have to "recapture" (add back to income) some of the previously deducted depreciation.

Choosing Between Standard Mileage Rate and Actual Expenses:

For Uber drivers and other self-employed individuals with significant vehicle use, this is a key decision:

• Standard Mileage Rate:

  • Pros: Simpler record-keeping (just track business miles).

  • Cons: You cannot deduct individual expenses like gas, oil, repairs, maintenance, insurance, or depreciation separately.

  • 2024 Rate: 67 cents per business mile.

  • 2025 Rate: 70 cents per business mile.

• Actual Expense Method:

  • Pros: Can result in a larger deduction if your actual vehicle expenses (including depreciation, insurance, gas, maintenance, etc.) are high.

  • Cons: Requires meticulous record-keeping of all vehicle-related expenses (receipts for everything, detailed mileage logs for business vs. personal use).

Recommendation:

For gig workers like Uber drivers, accurate mileage tracking is paramount regardless of the method you choose. Many apps can help automate this.

It's highly advisable to:

1. Track all your business miles.

2. Keep all receipts for vehicle-related expenses (gas, oil changes, repairs, insurance, car washes, tires, etc.).

3. At tax time, calculate your deduction using both the standard mileage rate and the actual expense method to see which one yields a larger deduction.

[SwapnaM]

Yes, both vehicle insurance and depreciation can be allowed as expenses for tax purposes if your vehicle is used for both personal and business use. However, there are crucial rules and limitations you need to follow.

Vehicle Insurance as an Expense

• You can deduct the business portion: If you use your vehicle for both personal and business purposes, you can only deduct the percentage of your auto insurance premiums (and other vehicle expenses) that is attributable to your business use. For example, if you use your vehicle 60% for business and 40% for personal activities, you can deduct 60% of the insurance cost.

• Method Matters:

  • Actual Expense Method: If you choose to deduct your actual vehicle expenses, you will include your insurance premiums, along with gas, oil, repairs, maintenance, registration fees, and depreciation (or lease payments). You then multiply the total of these expenses by your business-use percentage (business miles / total miles).
  • Standard Mileage Rate Method: If you choose to use the standard mileage rate (a cents-per-mile rate set by the IRS annually), you cannot also deduct actual expenses like insurance, gas, oil, or depreciation. The standard mileage rate is designed to cover these costs. You can still deduct business-related parking fees and tolls in addition to the standard mileage rate.

• Record Keeping is Key: Regardless of the method you choose, you must keep detailed and accurate records of your mileage, separating business miles from personal miles. This is essential for determining your business-use percentage.

Vehicle Depreciation for Tax Purposes

Yes, the vehicle can be depreciated for tax purposes if it's used for business, even if it's also used for personal use.

Requirements for Depreciation:

• The vehicle must be owned by you.
• It must be used in your business or income-producing activity.
• It must have a determinable useful life and be expected to last more than one year.

• Just like with insurance, you can only depreciate the business-use portion of the vehicle's cost. You must keep records to prove your business-use percentage.
• Actual expense method: The IRS allows you to depreciate the vehicle using the Modified Accelerated Cost Recovery System (MACRS), which typically classifies vehicles as five-year property.
• Standard Mileage Rate Method: If you use the standard mileage rate, depreciation is already built into the rate, so you cannot deduct it separately.
• To accurately determine your business-use percentage for both insurance and depreciation, you need to maintain a reliable mileage log.  For rideshare/delivery, session-based logging or a mileage tracking app is highly recommended.
• Choosing Your Method: You generally have to choose either the standard mileage rate or the actual expense method for a vehicle in the first year it's placed in service for business. If you use the standard mileage rate in the first year, you can switch to the actual expense method in later years. If you choose actual expenses in the first year, you generally cannot switch to the standard mileage rate for that vehicle in subsequent years. It's often beneficial to calculate both ways in the first year to see which yields a higher deduction.

Standard Mileage vs. Actual Expenses: Getting the Biggest Tax Deduction Please refer to this link for more info.

@Letty7 Thanks for the question!!