When Uber and the Tax Man Collide
Driving Home Some Points About This Intriguing New Business
The rise of Uber and similar transportation services like Lyft have been a boon for people looking to make some extra money on their own schedule. But they have also given rise to a number of taxation issues. For anyone looking to turn their personal vehicle into a part-time taxi service, here’s a handy guide to IRS rules for tax filing, expense deductions, and more.
By Sean Wandrei
You know your city has arrived when a transportation network company is operating in town.
Uber has been in the Springfield area for some time now. Uber has been in major U.S. cities since 2011 and is now in 66 countries and 449 cities worldwide. New companies, such as Lyft, are also popping up in these markets (Lyft is now in Boston). With the casino arriving in 2018, it is safe to assume that this industry could be expanding locally.
For those of you who do not know what Uber is, here is a quick crash course. Uber is a transportation service that allows passengers to connect with drivers in the area via a smartphone app. Prices are predetermined before the transaction occurs, and all fares are paid via the app with a credit card. Generally, no cash is exchanged. Uber is basically a taxi service where the driver uses his or her own automobile.
Of course, since transactions are occurring, there are tax ramifications for the driver. An Uber or Lyft driver is not an employee of Uber or Lyft. The drivers are independent contractors who are considered self-employed individuals. Drivers have to calculate their taxable income and pay federal and state income and self-employment tax on the profits.
Generally, drivers report income and expenses on Schedule C of IRS Form 1040. While most taxpayers will file as a self-employed individual on Schedule C, some may want to think about limiting the liability that they could be exposed to.
The taxpayer could file paperwork to make the entity a single-member limited-liability corporation (SMLLC). While there are additional costs (that are deductible) to create and maintain the SMLLC, it could be worth it for the liability protection in case of an accident or lawsuit. The IRS does not recognize a SMLLC for tax purposes, so a self-employed taxpayer would file Schedule C if it was an SMLLC or not.
Uber drivers earn revenues from the fares they collect from driving passengers. All the fares that a driver receives have to be reported as revenue even if no tax documents (1099-Misc or 1099-K) are received. As of this writing, Uber issues tax documents to all drivers no matter the fares earned. Lyft only issues 1099-K if the total fares are $20,000 or greater and there are 200 or more transactions (the minimum threshold set by the IRS).
Since most of these transactions occur with a credit card, form 1099-Misc would not be issued since that form is for cash payments in excess of $600. Any cash tips that are received should also be reported as a part of gross income. Ordinary and necessary business expenses, which are defined as common and accepted in the general industry or type of activity in which the taxpayer is engaged, can be deducted from the revenues to arrive at the taxable net income which is subject to both income and self-employment tax.
Let’s take a look at some of those expenses that an Uber driver could deduct. The first, and most obvious, expense is for the automobile driven. There are two deduction methods available for automobile expenses — the standard mileage method (the easiest to calculate) and the actual vehicle expenses. The taxpayer has a choice of what method to use.
Generally with expenses, you are going to select the method that will generate the largest deduction. One thing to note about the method choice: if the taxpayer elects to use the standard mileage method, he or she must do so during the first year the automobile is placed in service. Under the standard mileage method, the taxpayer determines the expense by multiplying the business miles driven during the year by the standard mileage rate (54 cents per mile for 2016). The tax form that Uber issues lists the miles driven while on fare, but those probably would not be the total business miles driven during the year. There are miles driven while not on fare that would be considered business miles, such as miles driven searching for the next fare, which could be deducted.
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Proof of these miles must be maintained in a daily log listing the business miles driven during the year. The other method for deducting automobile expenses, the actual vehicle expense, is more record-intensive. All actual business-use expenses incurred to operate the automobile during the year can be deducted. These expenses usually include gas, tires, repairs, maintenance, insurance, registration, and depreciation. Only the expenses directly related to the business can be deducted. The deductible costs are calculated by multiplying the actual costs incurred by the percentage of business use of the automobile.
Some other expenses that may be overlooked that could be deducted are car washes, USB and mobile-phone chargers, wireless plans, commissions paid, tolls, parking fees, floor mats, spare tire, flat-tire kit, jumper cables, AAA membership, supplies, music apps like Spotify, ice and snow scrapers, mobile routers such as a MiFi, and food and drink for passengers (limited to 50% deduction by law).
Only the portion of these expenses related to the driving business can be deducted. Any portion of an expense related to personal use is not deductible. Any expenses that are not listed above that are ordinary and necessary for the business could be deducted as well.
Some other expenses that could be deducted, which are not that common, include the home-office deduction and any health insurance paid for the driver and his or her family. The rule with deductions is that the taxpayer must prove the expenses were incurred, so all receipts from the expenses should be saved in case the IRS audits the tax return.
As sole proprietors, drivers are responsible for both income and self-employment tax on the profits. So it’s important to make sure all of the business deductions incurred are properly deducted.
While driving for Uber or Lyft can be a fun and easy way to make some extra cash, it is important to understand the tax issues that could arise from being a driver. As always, you should see your tax professional if you have any tax questions.
Sean Wandrei is a lecturer in Taxation at the Isenberg School of Management at UMass Amherst. He also practices at a local CPA firm; [email protected]