EP 44: Have you ever wondered what drives qualify as tax write-offs? Does it apply to just freelancers, or can employees benefit from this as well? How do I track my mileage every time? What are the differences between standard mileage and actual expense methods and which one applies to me? In this episode I break down the importance of leveraging your tax deductions on business mileage and how to determine what qualifies.Cradoc Foto Software
Michael Der 0:02
You're listening to Artrepreneurs, a podcast that inspires photographers and visual artists to live their best creative lives. My name is Michael der and I am a full time photographer with nearly 10 years of experience in the freelancing world. And I'm sitting down with an amazing community of visual artists to talk about process business in the lessons that have helped them grow. So let's get to it. Artrepreneurs starts right now.
All right, what is up everyone? Welcome to Artrepreneurs, thank you for choosing to click play on this or any one of our dozens of episodes currently cataloged in our library. Hopefully, we can provide you a little information and a little motivation to improve your creative business. Now today, I wanted to talk about mileage tracking for your business, because regardless of your profession, whether you're a teacher or a creative freelancer, your automotive cost throughout the entirety of your life, could very well be one of the major expenses that you incur on the reg, think about all the costs in owning a vehicle, you have the payments itself, but you also have to account for insurance, licensing, registration, taxes, maintenance fees, fuel tires, and oh yeah, that pesky thing called depreciation. So your annual expenses may be quite a bit higher than you even expect. And that's not even taking into account any accidents, damages or citations. So I bring all of this up, because I think it's important to understand the true cost of owning your vehicle. And if there are any ways to leverage that vehicle, no matter how small in your favor, you'd be a fool not to look into it, you could be saving hundreds, if not 1000s of dollars in taxes if you properly document the business miles that you drive. And so what we're going to do today is we're going to enter five basic questions about mileage tracking, and how it can help your business. So let's get started.
Number one who can deduct mileage so in order to receive the benefits of deducting mileage off your personal vehicle, the first thing that you have to know is you have to have a business, so a hobby is not going to cut it. Now I do go into length about when your hobby becomes a business in Episode 24. So if you do need a review of the nine IRS factors that define a business, check that episode out to determine if you qualify. But to give you a cliff notes version, just in case you're short on time, and this is the only episode you can listen to. Here's the main thesis, a hobby becomes a business at the point when its primary purpose is to generate profit. So when your craft be it, photography, videography, graphic design, hair and makeup, whatever it is, has the intent as well as the proof of intent to be a revenue generator, then more than likely you're going to qualify as a business. Again, if you need more explanation, check out episode 24 To understand what the IRS demands.
Now, mileage deduction tends to be equated with the self employed and that is a huge part of it. That's why I decided to make this episode. But I do want to mention that freelancers and employees alike are both able to take advantage of mileage deduction. So don't think that just because you're a full time why you can't claim mileage on your photography business. Your mileage just needs to fall under a separate business purpose other than the one that you're employed to do, which we're going to go over a little bit more in depth in the next part. Just know that being a full time employee doesn't disqualify you from deducting mileage. Rather, it's the type of circumstances that will determine if you can or can't.
Number two, what counts as business mileage. So to identify what qualifies as business mileage, we need to ask ourselves whether the drive had the intent of business purpose. Now that is the crux of it all. But naturally, it's not always spot on accurate. I mean, heck, you could argue that anything could have business intent, but the IRS doesn't like abuse of this deduction. So to avoid a potential audit, let's break down a few areas that will qualify as business mileage provided by the folks at mile IQ. Keep in mind that if you have any gray area that needs addressing, consult a CPA to discuss your specific business and what qualifies.
Number one, errands and supplies. So making a trip for business related errands qualifies as business mileage, this could be going to the post office, it could be going to the bank, it could even be going to the camera store for equipment and supplies. Now oftentimes, you're gonna find that this is a trip that many self employed business owners are going to forget to keep track of because they are so infrequent or small. But these trips can really add up at the end of the year to a large deduction. So don't forget about them.
Number two; business meals. So the drives that you're going to take to meet clients or vendors qualify as a business drive. And this could include trips for lunch, meeting coffee, happy hour, even dinner. The important thing to note here though, is that the purpose of the meal has to be to discuss how to generate revenue for your business. So what does not qualify is grabbing lunch with a colleague and incidentally talking shop, the purpose of the meeting has to be to drive business.
Number three, to and from the airport. So if you have an out of state job, not only are your flights tax deductible, but so it's the mileage that it's going to take for you to get to and from the airport. And if you're not using your personal vehicle and are instead using ride sharing apps like taxis or Ubers, or lifts, those costs can be deducted as well just not the mileage
number four; odd jobs. So this pertains to side hustles and gig work. For instance, my whole life is effectively gig work so all my mileage to jobs can be deducted. If you're an employee at the local college though your commuting mileage will not qualify but your freelance work for weddings and portraits on the side, we'll
number five; customer visits. So driving from your office or another worksite to meet with your customers or your clients for your business will qualify. This can include meeting them for general business reviews, negotiations, pitches, dropping off deliverables, and even picking up payment.
Number six temporary job sites. So a temporary job site is a location of work that you expect to last less than one year, and will qualify as a business mileage as it's not a permanent source of residence. For instance, if you're a photographer and you have a studio office, your morning drive to that office is not deductible. But if you spend two weeks driving instead to a client's studio, that would be considered a legitimate write off.
So now that we've spent a little time qualifying what business mileage is, let's identify what doesn't qualify as business mileage because the greater clarity that we have on the rules, the more accurate our documentation can be, and the less likely we'll be audited. So here are some scenarios that do not qualify as business mileage.
Number one, commuting, so the biggest mistake that people make is claiming they're commuting miles from home to work and from work to home. The IRS will not permit that as deductible business mileage. So it doesn't matter how far away your home is from your office, your commute is not deductible.
Number two, making business phone calls or checking emails during a drive. The IRS says that even if you try to justify it by doing work during the drive, you still can't claim that as business mileage. Not only is that highly unsafe to do work while driving, but it's an official no go for the IRS to claim deduction on that mileage
number three driving with equipment or paperwork in your car during personal trips. So just because you have a camera in the trunk or a laptop in your car does not automatically transform personal trips into business ones, your trip needs to be planned out with photography business in mind in order for you to claim business miles. So in other words, a camera in the car and getting you very far.
Number four driving recreationally with advertising on your vehicle. Alright, so if you have a car or a van decked out in your business logo that doesn't turn every drive into a professional one, you will have to qualify a business intent for that drive in order to claim tax deductions. So before you tack on a hideous paint job of your business logo on your car, just know that your mileage will be qualified like everyone else's. So ugly adds no dice. Think twice
number five, mixing personal and business trips. So if you do a job, but before heading home from that job, you would like to go to the beach or pick up a friend or head to the restaurant get drinks afterwards, you can't write off those miles, you have to subtract the personal ones from the professional ones. So Joy riding and recreational trips obviously do not qualify as any form of business mileage.
do I have to prove business mileage? So now that you know a rough idea of what qualifies as business mileage? What do you have to document to prove said mileage is tax deductible. Now you should not be guesstimating total mileage driven for business in the year. And just leaving it as that you want to be prepared to prove that each business trip was planned and had the intent of business. So according to the IRS, your mileage log must include a record of the following the dates, destinations, purposes, and miles driven for your trips. So basically, if any question comes up about a specific trip, you want to have sufficient evidence to back up your claim that it had the intent of business. And this is why client work is so important to have sent over in writing because you have proof of date, destination mileage and purpose of the trip. So for instance, if a client wants a scouting day before shoot, I have documentation of that request. And if I'm meeting up with a client to go over ideas for the next year, I'm confirming the date and the purpose in an email. So I'm not just relying on a phone call or a text message.
Now, under many circumstances, you might be asking yourself, How will anyone know whether these miles driven would classify as business or personal? I mean, is anyone really going to fact check me on this? Can I just lie and say I drove an extra couple 1000 miles of business more than I actually did? Well, the answer is yes, you can. And while the chances of you being audited are indeed very slim, with almost no real chance of jail time. With the exception of true tax evasion, I would simply say the cost of lying is going to be very steep. If you fail a tax audit, you're going to face one of two situations, you'll either face very heavy fines, or your next best option is to apply for an appeal hearing, and then file an official protest with the IRS which you will have to go through many steps of hiring either attorneys or representing yourself which will obviously take a lot of preparation and proof. No, none of that sounds pleasant to me. So as much as it may be enticing to pad your numbers a little bit. Just remember the juice may not be worth the squeeze.
Number five, how do I Track business mileage? So if you're on board with tracking this information for your business, the important question is how do I do it? For one you can keep a manual log where you write down the mileage for every single trip that you take and the starting and ending point on your odometer. This of course takes a lot of discipline even for someone like me, I am much lazier than that. I'm not even going to sugarcoat it folks. I prefer to use a mileage tracking app that can run in the background as I drive. So there are a lot of competitive apps out there that use your phone's GPS to measure each trip and all you have to do is a simple swipe left or swipe right to classify the trip as either personal or professional. So here are some noteworthy applications for you to research on your own time.
First, let me start off with a couple of dedicated mileage trackers. Number one is mile IQ. MileIQ is a very simple, yet elegant solution to tracking all your mileage. I use them for a couple years, and I really enjoyed how easy it was to track and how pain free it was to download all the driving data at yours. And to hand off to my accountant, they offer a basic free plan that allows up to 40 drives a month, and unlimited plans thereafter that start at $6 A month or $60 per year.
The second option is called Everland. Now everlands has the same mileage tracking features as MileIQ. But the app also has the option for users to connect a credit card or bank account that's related to their business. That means users can easily review and classify their purchases as business expenses, which means the end result is you'll be able to track the majority of your deductions in one easy semi automated experience. Now Everland offers three different packages a free option that tracks up to 30 trips a month, a $5 a month plan and a $10 a month premium plan.
Now the next two options I'm going to suggest are fully integrated accounting software's that can not only track mileage, but also handle the rest of your back end business like estimates, invoices and expenses. So while they are significantly more pricey than the first two options, just remember, they're offering a larger all encompassing service to your business, not just mileage tracking.
The first one is called FreshBooks, which is geared towards freelancers, self employed professionals and small businesses with employees through FreshBooks. You can submit estimates, track billable hours, payments, expenses and clients all in one. Now full disclosure, I have been a FreshBooks user myself for about five years. And when they integrated mileage tracking to the surface I was already paying for I immediately cancelled MileIQ and just went with my all in one platform.
The second option also just is called QuickBooks self employed. Now I've never used them because I've never had a reason to leave FreshBooks. But I've heard great things about them, and they are very well rated. So if you are new to the market for a one stop shop for all your self employment responsibilities, look into different packages offered in QuickBooks self employed, their intro plan starts at 1250 a month while their Plus plan kicks off at $40 a month.
So folks at this point, you already have the majority of information that you need to start tracking your mileage. And the reason as to why it's so important to do so what I haven't mentioned yet is that the IRS gives you two different options for writing off your driving expenses. Now if this next part confuses you, folks, please don't freak out. Like I said, you basically have all the information you need at this point. But I want to gloss over this next part so you can discuss the best course of action with your own CPA or tax professional, you want to determine what is going to save you the most amount of money. And in order to do so you may need a professional to assess your vehicle expenses, and your normal business. So don't be discouraged. If you get lost here, folks, just keep this information on the back burner so that you can ask the qualified professionals to expound upon it further. So with that being said, here we go.
There are two basic ways to calculate your deduction, you can use the standard mileage rate, or you can deduct your actual expenses. So the standard mileage rate method allows you to deduct a set amount per mile. Now at the time of this recording, the current US rate is determined by the IRS at 56 cents per mile. And over the last several years, it has been known to teeter up or down a couple cents depending on the changes to the tax laws, but it generally hovers in this ballpark. So for example, if you drive 10,000 lawful business miles, if you multiply 56 cents times 10,000. That means $5,600 can be claimed in tax deductions.
Now, before I go any further, folks, I want to go into a quick little tangent, although it's very, very relevant. So one of the biggest misunderstandings of tax deductions and taxes in general is this notion that if something is tax deductible, it's basically free. That is not at all what is happening here. So when I say $5,600 can be claimed in deductions, that does not mean you get $5,600. Back, I want to be very clear on that. That would be a tax credit. Deductions, however, lower your taxable income by the percentage of your highest federal income tax bracket. So if you fall into the 22% tax bracket, for instance, a $1,000 deduction could save you $220, that's 22% times 1000. And in context of the example that I'm providing, if you drive 10,000 miles, that $5,600 of deductions would be multiplied by your marginal tax bracket at 22%, which would save you $1,232. Now, if your brain is just a little bit fried, because it's hard to visualize all the numbers that I'm throwing at you, that's totally okay. The numbers aren't as important to memorize, I just wanted to highlight the point that deduction money isn't $1 for dollar trade. So just in case your mind was going down that road, just remember, your savings are going to be based off of the tax bracket that you ultimately fall in. So with that out of the way, let's get back to the standard mileage rate method just for a second,
because of its simplicity to calculate. You basically just multiplied the mileage driven by the current rate, which is 56 cents. As I mentioned, this method is often used by most freelancers and solopreneurs. It's very easy to track, very easy to calculate, but not every situation is going to call for
the other method is called the actual expense method. where you can claim deductions for all your vehicle expenses, not just your mileage. So to use a tax deduction, you must keep track of all the requisite cost to maintain and operate the car when you use it for business purposes. These costs include fuel, oil, tires, insurance, registration, fees, repairs, licenses, and depreciation or lease payments attributable to the portion of the total miles driven that are business miles. That is per the IRS folks. So I know that's very wordy. But essentially, if you use your car for business mileage, 60% of the time you drive it, you can qualify 60% of each vehicle expense as a deduction. So comparatively, the actual expense method is more suitable when your vehicles operating costs tend to be higher, aka, your vehicle is more expensive, because you can receive a much larger deduction when you factor in depreciation. The downside is it requires significantly more tracking and record keeping. So if you don't track every single expense, you're likely not going to get the best return.
On the other hand, the more economical your vehicle is to operate, the more likely it is that the standard mileage rate method will give you the bigger deduction. As an example, I purchased my used car a couple years ago for about $3,000. And I put a lot of miles on it for business expenses. So the standard mileage rate actually yields a greater return for me, particularly when I drive a lot.
Now to reiterate, folks, just one last time before I let you go, you don't need to have a decision on this. Now, this really is a question for your tax professional to guide you down the best path that fits your business. So ask him or her what method should we utilize for this past year. And going forward. Basically, it's just a numbers game. And so you want a professional guiding you towards the option that's going to save you the most amount of money consistently. And if you're moonlighting as a Lyft driver or for Uber Eats or any other ride sharing app, you should call a CPA immediately after this episode, because your mileage may be even more significant than just a traveling photographer. So it's important that you have the best plan of attack for your vehicle. Folks, we
are talking 1000s and 1000s of dollars being at potential play here. So if you want to save as much money as you can do your own reconnaissance into this area. And even if you merely drove just 5000 miles this year, which is not a whole lot. You could claim 20 $100 in tax deductions, which by my math could save you in excess of over $900 folks that $900 is yours. That's how I see it my friends, don't overpay in taxes. Keep what is yours. Learn how deductions can help reduce your taxable income folks, it is one of the most powerful tools at your disposal. And if you have taken anything away from this episode, if you have a greater sense of what business mileage consists of, if you can get started on tracking your mileage, you are off to such a great start my friends trust me folks, this is worth kicking the tires on pun intended. Alright, that is going to do it folks. Kudos to those of you who made it to the end celebratory high five for sure. Don't forget to follow us on Instagram at Artrepreneurspod. Thank you for tuning in. Folks I am out of here for now. Enjoy your day and see you next week.
Hey everybody, this is Michael der thank you so much for making it all the way to the end of the episode. I hope you'll follow tag and engage with us on our Instagram account at Artrepreneurspod. We've also launched our website Artrepreneurspod.com. It is the central hub where you can sign up for our newsletter, read our blog posts, send us voicemails, and even access discounts from our amazing affiliates. It's also the perfect spot to shout out Artrepreneurs with what would be an immensely appreciated five star rating and review. And if you're feeling extra generous, you can even make a small donation that's really going to help accelerate the growth of this podcast. But no matter what you do, folks, I just want to say thank you so much for supporting this program. There are a lot of great photography podcasts out there and I am just grateful to have gained your trust even for him. We'll take care of you will see you next week.
Transcribed by https://otter.ai