Rideshare (Uber, Lyft, etc.) drivers actually have two options for deducting auto expenses attributed to driving passengers for hire. These methods include the standard mileage rate method (available starting in 2011), and the actual expense method, also known as the mileage vs. actual expense methods. Your total deduction and recordkeeping requirements differ depending on which method you choose. Aside from some small exceptions, the IRS actually lets you switch between methods each year. This allows you to pick the most beneficial method year after year.
The standard mileage rate method part of the mileage vs. actual equation gives you a deduction equal to the total business miles you drove for the year times the standard mileage rate. In 2019, the standard mileage rate is 58 cents (57.5 cents for 2020). For example, if your total miles for the year were 10,000, and 4,000 of that were business miles, your deduction would be $2,320 (4,000 * $0.58 = $2,320). Aside from some information about your vehicle, the business mileage driven, and some form of corroborating evidence (such as your account statement), you don’t need any other support for this deduction.
The actual expense method allows you to deduct the business portion of auto related expenses that you incurred during the year, based on the percent of business mileage driven. Some, but not all, of these expenses include: gas, oil, tires, lease payments, maintenance/repairs, insurance, registration fees/tags, and depreciation. For example, let’s say you spent about $1,200 on gas, $1,000 on insurance, $500 for new tires and $300 for some oil changes (in most cases you are entitled to a depreciation deduction as well, but I left that out for simplicity for this example). This comes out to $3,000 of actual expenses incurred for the year. You would then take this amount and multiply it by the ratio of your business to total use of your vehicle. Following our above example, this would be $3,000 * (4,000/10,000) = $1,200. For this method, you would need to keep your receipts/documentation for the applicable expenses.
Using our hypothetical numbers, the standard mileage rate method is more beneficial for you to use in the current year.
To confuse things further, there are certain auto related expenses that you get to deduct regardless of which method you choose. Examples of these include: parking fees, tolls, and personal property taxes.
Probably the most important item, regardless of which method you choose, is to accurately track and document your mileage. You need to know the total miles you drove the car for the year, and you need to know your business mileage driven. Business mileage includes your mileage for getting to your fare destinations. You want to capture all business mileage because it increases your deductions for both methods. Do your own mileage vs. actual expense calculation to determine what is best for you.
Confused? I get it. By trying to make things simpler, the IRS has complicated matters further. If you decide you need help with your taxes, be sure to check out my product page.