MileIQ can take a load of the work off your shoulders and help ensure compliance.
So it’s that time of the year again… You’ve been working that side-hustle for *insert ride sharing app name here* this past year and you might have a few questions about how this whole “independent contractor” thing works. What does this mean for your taxes? Well, if you’ve never ran your own business before, it could mean the IRS is going to want to see some new schedules on your return… and yes, working as an independent contractor means you are running your own business. Congrats boss (wo)man!
Having your own business carries a few more responsibilities that can make tax season just a bit more stressful given the additional recordkeeping required of businesses. Here at Taxfyle we’ve seen customers come across a number of shoulda-woulda-coulda’s that might’ve helped lower their liability if only they would have maintained some decent records throughout the year.
What we mean by this, is you should always track any activity or expense that could allow for a deduction on your tax return. Specifically as it relates to business owners where there are a number of deductions that may be claimed on your return that would otherwise be nondeductible for individuals. The IRS allows you to deduct ordinary and necessary expenses that are needed to operate the trade or business.
Will you have to substantiate all the deductions claimed on your tax return? No… but in the off chance you are selected for an audit, the IRS will definitely be asking for proof on the big ticket items. Fortunately for you, in today’s day and age, there are a number of applications available to help individuals and businesses track their activity in a simple and efficient manner. One of the larger deductions you can expect as ride-sharing partner is going to be your miles. For 2016, the IRS allows for a deduction of $0.54 per mile driven. This can add up to a significant amount by the end of the year if you have been an active driver.
Given the fact that the IRS knows that small businesses tend to be more laxed in their record-keeping; often times, they will scrutinize small businesses and sole proprietors (independent contractors). Statistics show that small businesses are more likely to be audited by the IRS than individuals who don’t own a business, as the IRS largely relies on sole proprietors to self report their activity. The risk of audit may increase further when mileage deductions are taken as the substantiation requirements are typically higher and more difficult to reconstruct. The IRS may request that you substantiate your actual mileage, dates the miles were driven, locations visited and business purposes. Apps such as MileIQ can take a load of the work off your shoulders and help ensure compliance. In this case, an ounce of prevention is worth a pound of cure since the Internal Revenue Code (the IRS rule book) provides that no deduction will be allowed (by the IRS or the Tax Court) due to approximations or unsupported testimony of the taxpayer.
Also worth noting that taxpayers have the option of deducting the standard rate (.57 cents) per mile or their actual expenses. Most people rely on the standard mileage rate as opposed to deducting their actual expenses since this method is much easier to follow. Under the actual expense method, expenses for gas, repairs and maintenance and depreciation must be maintained… and this can be a pretty big headache when you consider the fact that you still need to prorate these expenses for the time your vehicle was used for business purposes vs personal purposes. On top of that, these tracked expenses hardly provide a deduction much greater than the standard mileage method… so they may not be worth the added effort.
Good luck this Tax season!
Ralph Carnicer CPA, ping-pong table owner, beard connoisseur, powerpoint jedi.
