Section 3 – Self-Employed and Business Owners Tax Deduction

This section of our information hub includes the information about the mileage reimbursement for self-employed or business owners in the United States and what are the best ways to track and report mileage for tax deduction purposes. This section also contains one of the most important information to those who are freelancers, independent contractors and rideshare drivers. This article has been written to provide the necessary details or data for the employers or employees that can help them in such circumstances. In this article, we will learn about the rules surrounding mileage tax deductions for those who are self-employed in the US, and give you an explanation on how to calculate mileage and expenses of self-employed deductions.

If you’re doing a business and you are also a self- employed tax payer. You have the right to deduct the expenses accrued. If you are using your automobile exclusively for conducting business as someone who is self-employed, you may do the deduction of all expenses that are associated with using that vehicle, that includes oil changes, maintenance, repairs, tire replacement and rotations, etc. Like If you use a car solely for business, you have the right to deduct all the expenses that are related to operating the car.

If you make the use of your personal automobile for both business and personal activities, then only the expenses that are associated with conducting business can be used for tracking for deduction.

It’s mandatory for self-employed individuals to understand several things when they start mileage tracking and reporting. First, it is important for self-employed individuals that they should have the proper understanding of the details and specific mileage calculation and tracking. You can take the advantage of all deductions available as the best course of action and you can also save on overall tax exposure. Secondly, the information contained within these information hubs act as the helpful guides but that should not be viewed as resources from accounting professionals or tax. It is necessary for self-employed individuals to always check the information contained within the IRS website that tells us about the reimbursement of mileage expenses. Along with this, self-employed individuals should consider checking with a professional tax or accounting professional to ensure that they will understand all possible requirements for reimbursement of mileage.

Two Different Ways To Calculate Mileage Deductions

There are two different ways that can be used by the self-employed individuals for the calculation of mileage expenses for the purposes of tax deduction.

Standard Mileage Rate

When this method is chosen by the self-employed individuals, actual miles are driven and the calculation of the actual expense is done with the use of IRS. For example, as of January 2020, the standard mileage rate is 57.5 cents (or $0.575) per mile.

Actual Expenses

Expense method is the other method that can be used by the self- employed persons to claim deductions for expenses related to operating an automobile used for conducting business related activities. With this method, the self-employed individual can list expenses, that includes gas, repairs, insurance, maintenance, etc. The IRS issues an updated list of what business owners and self-employed individuals are able to claim when using this method.

It’s possible for self-employed individuals or business owners to qualify for both the methods, but it is necessary and helpful to understand which rule should be applied to each method. When using standard mileage rate, it is critical to keep track of actual trips and their length (in miles). For those who are using actual expenses, keeping track of all the expenses is required.

What To Do When You Own or Lease The Vehicle

In order to qualify for the standard IRS mileage reimbursement rate, self-employed individuals or business owners must either own or lease their vehicle(s) being used for the business. For both ownership and leasing, the criteria is little different.

Owns The Vehicle

If you have your own vehicle, then there should be the use of following requirements:

● During the first year of operation in the business, the standard IRS mileage rate must be used for reimbursement. For all following years, the self-employed individual or business owner may switch back and forth between the mileage rate method and the expenses method.

● There can be no claimed depreciation deductions on the car, except by the straight-line method.

● There can be no claim of a section 179 deduction or the vehicle’s special depreciation allowance. IRS also provides the updated information about a vehicle’s business use that can be reviewed for more information.

Lease The Vehicle

If the vehicle is leased, then one should make the use of below listed requirements:

● The standard mileage rate must be used for reimbursement during the first year of operation in the business.

● For all subsequent years, there should be the use of standard mileage rate method during the entire period the vehicle is being leased. Periods of renewals and newly leased vehicles have been covered here.

● Simultaneously using five vehicles or more for the business (i.e. fleet operations) is not allowable. It is allowed to switch between each vehicle. This requirement is helpful as it allows self-employed or business owners to be mindful of using more than four vehicles for business at any given time.

What Kinds of Vehicles Qualify For Mileage Deduction?

Cars, vans, pickups, panel trucks, etc. are the vehicles that we use for the business that can qualify for the self- employed mileage deduction includes

Tracking And Keeping Records of Mileage

For keeping adequate records, the IRS mileage reimbursement calculator has a definition. For all transportation associated with the business, the IRS requires self-employed individuals or business owners to log the following:

● mileage for each business use

● total mileage for the year

● time, place (your destination), and purpose

It is important that records should also be timely recorded at or it should be done near the time of the incurred expense. The various practices that are deemed acceptable by the IRS includes trip diaries, logs and sheets, as well as account books or similar records.

In case if you are using a vehicle for both personal and business, records should show business vs. personal use of the vehicle as a percentage. This will include a log of all trips and calculation of all the shares used for the business.

To make tracking mileage easy for business expenses, TripLog Mileage Tracking provides the best way to use mileage apps in your smartphones that allow self-employed individuals and business owners to remain on top of record keeping.

What Is The Current IRS Mileage Rate For Self-Employed?

The IRS has determined that self-employed individuals may deduct 57.5 cents per business mile when mileage calculation is done. Along with this, the rates for medical, moving, charitable and federal mileage reimbursement is also set. The rates for 2020 are as follows:

● $0.575 per mile for business

● $0.17 per mile for medical purposes

● $0.17 per mile for moving (used only for Armed Forces individuals on active duty)

● $0.14 per mile for service of charitable organizations

Calculating Deduction and Business Usage

Determination of the percentage of their vehicles that they are using for business and personal is important for the individuals. The mileage calculation is not too a complex process, but one can make the use of the following example that can be proved helpful:

● There are ten trips that have been taken during the course of a month, with each trip equaling 20 miles. Total personal miles within that month would come to 200 (10×20 = 200).

● Within the same month, there were three business trips taken that totaled 100 miles.

● When figuring out business use, you can divide business miles by the total number of miles driven. In this example, 33% of the time (100/300 = 0.33), the vehicle has been used.

● Multiply the number of business miles with the mileage rate, 58¢.

● This example shows that the business mileage expense for this month would equal $57.50 in (100×0.575).

Transportation That Qualifies For Business Deduction

There is no maximum for the number of miles that can be claimed for deduction. One of the best things that you should always keep in your mind is to keep in mind that “How many miles do you drive for business purposes?” Along with this, there are various additional items to keep in mind while considering mileage deductions for business.

What Constitutes Business Mileage?

● Driving between two different places of work

● Driving to meet clients or conducting client work

● Driving associated with business activities

What Does NOT Constitute Business Mileage?

● Commuting to work from home

● Carrying tools or other business items during a commute

● Having advertising or company information displayed on your vehicle

For additional information regarding working from home and related guidelines, you must visit the IRS website.

Additional Expenses

In addition to tracking mileage expenses and reporting them in a proper way, self-employed individuals and business owners should keep in mind that other expenses, such as parking fees, tolls and related costs incurred when conducting business qualify for deduction. These costs do not qualify for deduction if commuting to your place of work.

That’s the guidance that we have provided on the basics of deducting mileage or tax deductions for self-employed in the US. We hope we’ve been of assistance!

Happy tracking!

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Mileage & Expense Tracking and Reimbursement


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