&lt;h2>Vehicle Expense Deduction&lt;/h2>&lt;h4>Not for Employee&lt;/h4>&lt;p>A business expense deduction that impacts many self-employed taxpayers, especially with the popularity of rideshare and personal deliveries, is the deduction for business use of a vehicle, also called the vehicle expense deduction. This deduction is taken on Schedule C as an expense that reduces taxable income and is available to self-employed taxpayers who use their vehicle in the course of performing their business duties. If the vehicle is used entirely for business, generally the full cost of owning and operating the car may be eligible for deduction, although certain limitations exist. When the taxpayer uses the car for both business and personal purposes, only the business use portion is deductible. Most other employee-taxpayers (W-2) are not eligible to deduct vehicle expenses although they may be eligible for nontaxable reimbursements for business miles driven on behalf of their employer. &lt;/p>&lt;p>The IRS has two methods available to taxpayers to calculate the vehicle expense deduction—the actual expense method or the standard mileage rate method. There are qualifications to use each method and a taxpayer eligible to use either method should calculate their vehicle expense under each then choose the method that provides a larger deduction.&lt;/p>&lt;h4>Actual Expense Method&lt;/h4>&lt;p>As the name implies, the actual expense method uses the actual costs of vehicle operation. These costs include gas and oil, repairs and maintenance, tires, insurance, registration fees, and depreciation (or lease payments if applicable). The taxpayer totals the amount spent on these items for the year then multiplies the total by the percentage of business use. Percentage of business use is calculated by dividing the number of business miles driven by the total number of miles driven for the year. Parking fees and tolls paid for business-related trips are 100% deductible expenses and are not included in the calculation of actual expenses subject to the business use percentage. &lt;/p>&lt;p>&lt;strong>Example:&lt;/strong> Sam drove a total of 15,670 miles in his personal vehicle this year. Of that total, 5,290 miles were driven for the business he operates as a sole proprietor. Sam’s percentage of business use is 34% (5,290/15670 = .337, rounded up to 34%). Sam’s actual expense total was $5,850 and he paid $460 in parking fees and tolls. &lt;/p>&lt;p>Using the actual expense method, Sam would be able to deduct $2,449 on Schedule C, which is $1,989 ($5,850 × .34) plus $460 for business-related parking and tolls. &lt;/p>&lt;h4>Standard Mileage Rate Method&lt;/h4>&lt;p>The standard mileage rate method is a simple calculation. The IRS publishes an annual standard mileage rate which is multiplied by the number of business miles driven to calculate the vehicle expense deduction. Just like with the actual expense method, parking fees and tolls are added to the amount deductible when using the standard mileage rate method. The standard mileage rate typically changes each year and has been known to go up or down. &lt;/p>&lt;p>&lt;strong>Example:&lt;/strong> Sam decides to calculate his deduction using the standard mileage rate. He drove 5,290 business miles and has $460 in parking fees and tolls. If the mileage rate for his tax year is 55 cents ($0.55) per mile, Sam’s standard mileage rate deduction is $2,910 (5,290 × .55) plus $460. Using the standard mileage rate method, Sam’s vehicle expense deduction would be $3,370 on Schedule C. As the higher amount, assuming he is eligible, Sam should use the standard mileage rate method for his vehicle expense deduction. &lt;/p>&lt;p>Eligible self-employed taxpayers may take a vehicle expense deduction using one method or the other but not both. If the standard mileage rate method is chosen for a tax year, other than business-related parking fees and tolls, no other actual vehicle expense may be deducted. Mileage may not be deducted when actual expenses are being used. &lt;/p>&lt;p>To use the standard mileage rate method, the taxpayer must use this method the first year the vehicle is placed in service. If the standard mileage rate method is used on a leased vehicle, it must be used for the entire lease period. Other limitations apply if the taxpayer operates more than four cars or has previously taken deprecation or certain other deductions. &lt;/p>&lt;p>After using the standard mileage rate method for the first year, the taxpayer is eligible to switch between methods in future years. IRS Publication 463 - Travel, Gift, and Car Expenses provides more detail on the specific depreciation-related rules that must be taken into consideration when alternating between the actual expense method and the standard mileage rate method. &lt;/p>&lt;h4>Recordkeeping&lt;/h4>&lt;p>As with all other items of income or expense reported on a tax return, the IRS has recordkeeping requirements for the support of vehicle expenses deducted for business use of a self-employed taxpayer’s vehicle. In general, records should be kept for at least three (3) years from the date the return is filed, although certain circumstances can extend this period and should be reviewed before destroying records. Evidence of deductible business expenses must be kept in real-time, meaning as close to when they occur as possible. &lt;/p>&lt;p>If the IRS asks to inspect evidence of vehicle expenses or mileage, a document created to substantiate historical activity is not sufficient. The IRS suggests keeping a daily log (which can be kept manually or electronically using a mileage tracking app) as an efficient way to accurately track and report business expenses, including business use of a vehicle. Receipts and other documentation should include as much detail as possible such as dates, locations, and itemization of charges. Publication 463 includes helpful examples of data logs for collecting information on deductible business expenses. &lt;/p>&lt;p>The standard mileage rate method is straight-forward as long as the initial eligibility rules are met. Once the actual expense method is involved and depreciation enters the picture, taxpayers should rely heavily on Publication 463 to navigate the vehicle expense deduction. Additional topics covered in Pub 463 include: vehicles used less than 50% for business, section 179, special depreciation, leased cars, and disposition of the vehicle either through sale, trade-in, or casualty or theft. &lt;/p>

Vehicle Expense Deduction

&lt;h1>Schedule C and Common Business Expenses&lt;/h1>&lt;h4>Definition&lt;/h4>&lt;p>Individuals who receive income from a business they operate or from a profession practiced as a sole proprietor are considered self-employed. Self-employed individuals include independent contractors, partners in partnerships carrying on a business, and almost anyone else engaged in business for themselves. A taxpayer has business income if the main reason they are in engaged in an activity is to earn income or make a profit and they participate in the activity regularly and with consistent engagement. &lt;/p>&lt;p>To calculate business income or loss from self-employment activities, taxpayers complete Schedule C as an attachment to their individual tax return (Form 1040). A significant part of the form is the section where business expenses are identified. Allowable business expenses reduce business income which reduces the taxpayer’s total tax liability. When expenses exceed business income, the taxpayer has a business loss. An allowable business expense is one that is both ordinary and necessary for the operation of the business. &lt;/p>&lt;p>According to IRS Publication 535, ordinary expenses are “common and accepted in your industry”; and necessary expenses are “helpful and appropriate for your trade or business.” Certain expenses are not deductible business expenses and those include cost of goods sold (COGS), capital expenses and personal expenses. &lt;/p>&lt;h4>Purpose of Schedule C&lt;/h4>&lt;p>Schedule C identifies nearly twenty (20) different deductible business expenses, with an extra line for “Other expenses” where another seven-plus business expenses are deductible. Common deductible business expenses include: &lt;/p>&lt;ul>&lt;li>Advertising and Marketing&lt;/li>&lt;li>Home office expense&lt;/li>&lt;li>Car and truck expenses&lt;/li>&lt;li>Insurance&lt;/li>&lt;li>Office Expenses (office supplies and postage)&lt;/li>&lt;li>Repairs and Maintenance&lt;/li>&lt;li>Supplies (not part of COGS, includes materials/equipment used in business and consumable during the year)&lt;/li>&lt;li>Travel and meals&lt;/li>&lt;/ul>&lt;h4>Tracking Expenses&lt;/h4>&lt;p>Self-employed individuals should take great care in tracking their business expenses during the year. If the IRS selects a tax return for examination, the taxpayer may be required to substantiate (prove through documentation) the business expenses claimed on Schedule C. The type of expense determines what method must be used for tracking and documenting each expense. At a minimum, there should be proof of the date of payment, payment amount, and business purpose for each expense. Certain expenses require additional documentation like the standard mileage deduction for cars and trucks that also requires precise mileage tracking, or business meals that require the names of those in attendance at the meal. &lt;/p>&lt;p>When reporting business expenses on Schedule C, taxpayers should use the exact amount they are able to substantiate. Tax returns that include expenses that appear to be estimated (or that are all round numbers) may draw unwanted IRS attention. If the IRS does request to examine documentation in support of business expense deductions, the taxpayer needs to provide reliable records and cannot generate supporting documentation “after the fact.” &lt;/p>&lt;p>Other things that could draw unwanted IRS attention, and that are commonly misinterpreted by the taxpaying public, include the deduction of certain expenses that aren’t considered business expenses by the IRS and over-deducting the cost of business meals and entertainment. Keep in mind, the business expenses discussed here are in relation to deduction from self-employment income and are not deductible expenses for employees. &lt;/p>&lt;h4>Common Myths About Expenses&lt;/h4>&lt;p>Nondeductible business expenses include things like work-related clothing, vehicle advertising, and what some people call boondoggles. While it is true that a portion of these costs may be deductible, certain requirements must be met. When it comes to work-related clothing, to be a deductible business expense the clothing cannot be suitable for everyday wear. For example, a self-employed consultant who buys a suit to attend business meetings cannot deduct the cost of the suit as a business expense because suits are also worn during everyday life. A self-employed electrician who buys a hard hat and electrical-rated gloves would be able to deduct the cost of these items because they are not typically considered everyday attire. &lt;/p>&lt;p>Vehicle advertising is another misunderstood business expense. The cost to put a logo or other business advertising on a business-use vehicle can generally be deducted as a marketing expense. What cannot be deducted is the cost to operate a vehicle that is used for personal purposes simply because the business logo is on the vehicle and using the vehicle publicly may provide “advertising.” &lt;/p>&lt;p>A boondoggle is another word for a trip, excursion, or activity that is mainly for entertainment but that is disguised as a business expense despite not meeting the requirements for amount of time spent on business. Individuals unfamiliar with deductible business expenses often falsely assume that as long as business is discussed on one of these boondoggles, the entire cost of the trip is deductible. In fact, not only does the IRS specifically exclude the deduction of expenses for business travel that are considered lavish or extravagant, or that are for personal purposes, but the IRS also limits most of the expense deduction to the amount of time actually spent on business. &lt;/p>&lt;p>Deducting business meals and entertainment expenses can also get a self-employed taxpayer in hot water. Previously, business taxpayers could deduct the cost of entertainment expenses, like season passes to a sporting event, with the expectation that the entertainment cost was directly related to starting and building relationships with clients. In general, entertainment expenses are no longer deductible business expenses according to the IRS. There is an exception for deducting entertainment that is mainly for the benefit of all employees such as annual picnics or company team building (cannot be exclusively for highly compensated employees). The deduction limit for business meals continues to fluctuate between 50% and 100%, depending on the tax year and the business purpose of the meal. Generally, a business meal for the benefit of the business and its employees, like the cost of a holiday party meal, is 100% deductible. Otherwise, the deduction for business meals is 50% (in certain tax years a suspension of the 50% rule may apply thus allowing for a 100% deduction). &lt;/p>

Schedule C and Common Business Expenses

&lt;div>&lt;h2>Paying Quarterly Taxes (Estimated Taxes)&lt;/h2>&lt;h4>In General&lt;/h4>&lt;p>It’s no secret that most income, earned or unearned, is subject to at least one tax. For workers, both employees and the self-employed, taxes include federal income tax (determined by filing status and adjusted gross income) and employment taxes which are the social security and Medicare taxes. The IRS expects taxes to be paid throughout the year as income is earned or received. The two most common ways of paying taxes are through withholding or estimated tax payments (also called quarterly tax payments). &lt;/p>&lt;p>Generally, an individual whose only income is from W-2 employment doesn’t have to worry about paying quarterly taxes, assuming they completed their W-4 withholding form properly because their employer takes care of it. The requirement to pay quarterly taxes initially exists when an individual expects to owe tax of $1,000 or more on the due date of their tax return. &lt;/p>&lt;p>Examples of situations often resulting in an estimated tax requirement include:&lt;/p>&lt;ul>&lt;li>Taxpayers receiving retirement or social security payments who did not request voluntary withholding, &lt;/li>&lt;li>Taxpayers receiving additional income not subject to withholding such as interest, dividends, alimony, capital gains, and prizes or awards, and &lt;/li>&lt;li>Self-employed taxpayers, like independent contractors, partners, and S corporation shareholders &lt;/li>&lt;/ul>&lt;p>Federal income taxes are assessed using the progressive tax brackets for the year applied to an individual’s taxable income. The amount of income subject to tax in each bracket is based on filing status. The federal income tax rates range from 10% - 37% and the portion of income in each bracket is subject to that bracket’s rate.&lt;/p>&lt;h4>FICA vs SECA&lt;/h4>&lt;p>Employment taxes are commonly referred to as FICA taxes. FICA is the Federal Insurance Contributions Act which governs the amount of social security tax and Medicare tax collectible on the wages of each employee taxpayer. The FICA tax percentage is 15.3%, which is 12.4% social security tax and 2.9% Medicare tax. Employment taxes are paid one-half by the employer (7.65%) and one-half by the employee (7.65%). The employee portion of FICA taxes is withheld from the employee’s paycheck and submitted to the taxing agency by the employer, along with the employer’s portion. &lt;/p>&lt;p>Employment taxes for self-employed individuals are governed under SECA–the Self-Employed Contributions Act. Applicable in the same percentages as FICA—social security tax at 12.4% and Medicare tax at 2.9%—paying SECA tax is handled entirely by the self-employed taxpayer. &lt;/p>&lt;h4>Calculation and Payment&lt;/h4>&lt;p>To determine if estimated taxes are owed and how much the quarterly payments should be, the IRS provides taxpayers with Form 1040-ES. Form 1040-ES includes a calculation worksheet and detailed instructions for completion.&lt;/p>&lt;p>In general, estimated taxes are due if an individual taxpayer expects to owe $1,000 or more (after subtracting withholding and refundable credits) on the due date of their tax return, and the taxpayer expects their withholding and refundable credits to be less than the smaller of:&lt;/p>&lt;ul>&lt;li>90% of the tax expected on the current-year tax return (the year for which the tax is being calculated), or &lt;/li>&lt;li>100% of tax on the prior year’s tax return (the year immediately preceding the year for which the tax is being calculated)&lt;/li>&lt;/ul>&lt;p>Withholding and credits are treated as payments towards the taxpayer’s liability. Withholding is the tax taken out and applied at the time the payment is earned or received. Credits, typically calculated during return completion, are either refundable or nonrefundable and reduce the tax liability leaving either a balance due, no balance ($0), or a taxpayer refund. &lt;/p>&lt;p>&lt;strong>EXAMPLE&lt;/strong>&lt;/p>&lt;p>Victor’s tax liability this year is expected to be $20,000. His tax liability last year was $14,000. His withholding and credits for the year total $15,000. &lt;/p>&lt;ul>&lt;li>90% of the expected current-year tax liability is $18,000 ($20,000 × .9)&lt;/li>&lt;li>100% of the prior year tax liability is $14,000&lt;/li>&lt;/ul>&lt;p>The smaller of the two numbers is $14,000. Although Victor will owe more than $1,000 on the due date of his return, he will not owe estimated quarterly payments because his withholding and credits of $15,000 was more than his $14,000 threshold. &lt;/p>&lt;p>If Victor’s withholding and credits weres expected to be less than $14,000, he would use the worksheet in Form 1040-ES to calculate the anticipated shortage then divide by four to get each quarterly payment. Form 1040-ES includes payment vouchers for taxpayers choosing to pay estimated taxes by mail with a check or money order. Other methods for paying quarterly taxes include:&lt;/p>&lt;ul>&lt;li>Online&lt;/li>&lt;li>By phone&lt;/li>&lt;li>EFTPS&lt;/li>&lt;li>Mobile App&lt;/li>&lt;li>In cash in person&lt;/li>&lt;/ul>&lt;h4>Underpayment Penalties&lt;/h4>&lt;p>The IRS doesn’t allow taxpayers to pay the full amount due by the due date and call it even. Instead, if the correct amount isn’t paid by the due date for each quarterly payment, the individual may be assessed a penalty for underpayment. The penalty applies per quarter and continues until the payment for each quarter is made. &lt;/p>&lt;p>When income is earned consistently throughout the year, the taxpayer estimates the tax due and pays in equal quarterly installments per the dates above. If income is earned inconsistently, like seasonally or in a lump sum, taxpayers can annualize their income. For example, if a taxpayer receives a taxable distribution in November but had consistent income throughout the year, they could annualize their income to show that the tax burden on the distribution wasn’t applicable all year and was only due fourth quarter. &lt;/p>&lt;p>Taxpayers use Form 2210 to determine if they owe an underpayment penalty and to calculate the amount, to request a waiver of the penalty (from the list of waivers in the form instructions), or to have the IRS calculate the penalty. There are exceptions to the underpayment penalty for qualified taxpayers whose tax liability in the prior year was zero ($0), or whose total tax due on the current year return is less than $1,000.&lt;/p>&lt;/div>