Last week I begin explaining some of the tax consequences of the “sharing economy”, i.e. providing goods and services for money through services like AirBnb, Lyft, TaskRabbit, etc.
Last week I provided a (fairly exhaustive…and exhausting) overview of the correct ways to treat property rented through sites like AirBnb. This time, I’ll take a look at ride-share services like Lyft and Uber. If you made it through last week’s edition (because you’re some kind of masochist), this time it should be a lot easier.
Let’s start with the basics again. Unlike with renting out your home, where you don’t have to report income if you rent your main home out for fewer than 15 days, there is no equivalent “de minimis” amount of miles you can drive or rides you can provide before it’s considered income. Any money you receive for driving people around is going to be considered income to you.
“But wait!” (I can already hear some people saying…) “The ride-share service I’m driving for only accepts donations! We aren’t charging them anything!” Um…yeah…so the way I’ve heard that arrangement described by representatives of one of these companies is that you don’t have to pay, but…if you don’t pay, it will go on your account and any potential driver will see that, and so nobody will pick you up anymore. So if you’re giving people rides in expectation of a “donation”, and you’re not picking up the people who aren’t providing this “donation”…I can tell you right now the IRS is going to call that income. Nice try, though.
So now that we know it’s income, let’s get to the next step. What can be deducted against this income? This is where there’s good news.
Let’s assume you do this on a reasonably regular basis. Maybe not 5 days a week…maybe not even two days every week…but at least a day or two each month on average with an expectation of doing this continuously and the intention of making a profit by doing so. In this case, you’re pretty clearly operating a business. And as a self-employed individual, you’ll be filing Schedule C with your tax return, and deducting all of the ordinary and necessary expenses of this business.
This big expense is obviously the costs of driving around the car. And there’s good news here. The IRS has a “standard mileage rate” that allows you to deduct a fixed amount (currently 56 cents) for each and every business mile you drive…as long as you document it! This standard rate can come in very handy if you drive an efficient car with low costs to operate. And it saves you the hassle of saving every fuel and maintenance receipt, and then dividing all those expenses up based on how much personal use of the car you have. And only in the last few years has the IRS allowed drivers “for hire” to use this method; they used to be required to keep track of all actual expenses, plus a record of mileage which was required to determine the business portion.
But, as I mentioned, make sure you document your mileage. That means keeping a logbook or some other method where you regularly (i.e. every time you drive for hire) document the date, the miles driven, and the business destination. (You don’t necessarily have to record your entire route, but entering as many destinations as you can remember each time is a good habit. The company you drive for may even provide a report for you with this info.) Without that, the IRS may not allow a deduction for the costs of operating your vehicle.
Of course, you might not want to use the standard mileage method. If your car is expensive to operate, or you bought an expensive new vehicle primarily for providing rides for hire and want to take advantage of accelerated depreciation*, then it might make sense to use the actual expense method. But in my experience, the standard mileage rate usually results in a comparable or larger deduction than the actual expenses, and it’s less hassle.
Beyond the cost of operating the vehicle, you’re also able to deduct other necessary expenses required to provide your services. This may include tolls, fees you have to pay to operate, marketing expenses like business cards you give to riders, and other necessary expenses to acquire and retain business. However, you can not deduct personal expenses.
If you have to eat meals on the go, unfortunately that’s still considered a personal expense. Meals are only deductible in two situations. One is when you’re required to be away from home for a period that requires sleeping a full night (or day) away from home. I’m trying to choose my language carefully here because working the night shift doesn’t mean you’re away from home for a period that allows you to deduct meals, nor does taking a nap during a break. The concept is you’re away from home long enough that a sustained sleeping period (i.e. the amount of sleep you’d get in a typical 24 hour period) is required. The other time meals are deductible is if you’re having a meal with a client, or potential client, and having a business discussion.
Other nondeductible personal expenses would be things like getting a massage after a long day at the wheel, or headphones to listen to music while you drive. On the other hand, if you buy music that you play for customers in hopes of improving their experience and making them want to request you for next time…that might fly. There’s clearly some grey area here. But if an item is for the direct benefit of your customers and you can make a reasonable case that it helps you increase or maintain business, then it’s probably something you can deduct.
Hopefully by keeping track of your mileage, and the money you spent on items required to provide your “for hire” driving service, you can limit the income you have to pay tax on to just what you actually keep at the end of the day (and maybe even less than that if you have an efficient car and use the standard mileage method).
The one pitfall to avoid here is to have this activity classified as a “not for profit” or “hobby” activity by the IRS. Unlike with renting out part of your home, where you actually get a nice tax break if you try it a few times but decide not to continue, driving your car for hire is something you should plan on sticking with for awhile once you start. If you try it out a few times, but don’t do it on a fairly regular basis, the IRS might decide it’s just a hobby. The downside of that is you often lose the ability to deduct any of your expenses. There’s technically a way to deduct hobby expenses, but it’s on a part of the tax return that doesn’t do most people a lot of good.
So if you’re going to sign up with Lyft or Uber or any similar service, make a plan to stick with it for awhile and keep good records. This will help make the tax bite on your earnings as painless as possible. Good luck!
*”accelerated depreciation” basically means you get to deduct a big portion of the car’s total cost in the first few years of its life. Depreciation means deducting part of the cost of an item each year so that over a period of time (often 5-7 years) you wind up deducting the entire cost. Depreciation is “built in” to the standard mileage rate, but under the actual expenses method you have to calculate your allowable depreciation every year.