Contributed by: WrenD, FreeTaxUSA Agent, Tax Pro
Nowadays, many individuals earn some extra cash through various side hustles. Activities such as dog walking, ridesharing, delivering food, or renting space are common.
It's common for individuals to use the same personal vehicle for multiple businesses or hustles, which could raise questions about taxes. But no worries! While it might complicate things a bit, by keeping organized records of your vehicle's use and costs, we can simplify the process of figuring out vehicle expenses for tax purposes.
First, you need to figure out if your activities need to be reported as separate businesses or just as one single business. For the IRS, different businesses are determined by the type of activity rather than the issuer of Forms 1099-NEC or 1099-MISC. See the following examples:
- As a driver for Uber, DoorDash, and Lyft, you may receive various forms from each (such as Forms 1099-NEC or 1099-K). Despite this, your work for all three can be considered a unified business entity because it involves the same activity: driving. This means all three can be reported on one Schedule C.
- When working as a driver for the above companies and engaging in wedding photography, you will need a separate Schedule C for your driving services and another Schedule C for your photography business due to the significant difference in each activity.
Minimizing the number of Schedule Cs you file can significantly reduce the time and effort you spend on your tax return.
Keeping proper records
An important aspect of using one vehicle for multiple businesses is keeping track of your mileage and expenses for each business separately. You can use a logbook, a spreadsheet, an app, or any other method that works for you. Record the following information for each trip:
- The date and purpose of the trip
- Which business you drove for
- Starting and ending odometer readings (miles driven)
- The expenses incurred, such as gas, tolls, parking, repairs, etc.
You should also keep receipts and invoices for your vehicle expenses, as well as any other documentation that supports your business use of the vehicle. Finally, it is important to know your car’s odometer reading on January 1st and December 31 for the total yearly miles driven.
Preparing your tax returnYou will prepare a separate Schedule C for each business and will include the same vehicle on each Schedule C. When claiming the vehicle expenses, there are two critical points to keep in mind:
- You can generally choose to use either the standard mileage or actual expenses method. Whichever method you select must be used for all businesses using the vehicle.
- You will include the miles driven for each business as well as personal miles on each Schedule C. When there is more than one business, count ALL other miles—those that are personal or for different businesses—as personal miles.
Example
Let's look at an example where you use one vehicle for two businesses: Catering Service and Photography Studio. You drove 3,000 miles for Catering Service and 800 miles for Photography Studio. Your total miles driven for the year was 12,000. This would mean 8,200 miles were driven for personal purposes. Your vehicle expenses for the year were $6,000 (this includes gas, insurance, maintenance, and depreciation).
- If applying the standard mileage rate, you would deduct the IRS's per-mile rate for your vehicle expenses. For instance, if the IRS rate is 58 cents, you can claim a $1,740 deduction (3,000 miles at $0.58 each) for Catering Service and $464 (800 miles at $0.58 each) for Photography Studio, totaling $2,204 in deductions for both ventures.
- If you use the actual expense method, you can deduct your vehicle expenses based on the percentage of business use. Your percentage of business use for Catering Service would be 25% (3,000 / 12,000) and your percentage of business use for Photography Studio would be 6.67% (800 / 12,000). Your deduction for Catering Service would be $1,500 (6,000 x 0.25) and your deduction for Photography Studio would be $400 (6,000 x 0.0667). Your total deduction for both businesses would be $1,900.
Regardless of which method you choose, our software will figure out the calculations once you input the mileage and expenses. For more information on each method and its rules see our Business use of vehicle overview article.
Specifically in our software for this situation, follow this menu path: Income > Business Income (Schedule C) > Edit > Vehicle Expenses for Catering Service you would enter 3,000 as business miles and 9,000 as other personal miles (8,200 personal miles + 800 Photography Studio miles).
Then follow this menu path: Income > Business Income (Schedule C) > Edit > Vehicle Expenses for Photography Studio you'd enter 800 business miles and 11,200 other personal miles (8,200 personal miles + 3,000 Catering Service miles).
When entering Actual expense method for vehicle expenses, input the total yearly cost of each category (maintenance, oil change, insurance, etc.) on both businesses. The software will then automatically figure out the expense allocation for each business according to the mileage you have entered.
In conclusion, keep in mind that accurate, adequate records will help you in reporting your business income or losses correctly to the IRS and help you make business decisions for the future.
