Do you drive for Uber or Lyft, or are thinking of getting into this business? We’ve outlined what it’s like to work for these types of companies, including taxes, expenses, and write-offs:
Uber and Lyft treat drivers as independent contractors as opposed to employees. However, more than 70 pending lawsuits in federal court, plus an unknown number in the state courts, are challenging this independent contractor status. As the courts have not yet reached a decision on that dispute, this analysis does not address the potential employee/independent contractor issue related to rideshare divers; it only deals with the tax treatment of drivers who are independent contractors, using Uber as the example.
How Uber Works – Each fare (customer) establishes an account with Uber using a credit card (CC), Paypal, or another method. The fare uses the Uber smartphone app to request a ride, and an Uber driver picks that person up and takes him or her to the destination. Generally, no money changes hands, as Uber charges the fare’s CC, deducts both its fee and the CC processing fee, and then deposits the net amount into the driver’s bank account.
Income Reporting – Uber issues each driver a Form 1099-K reflecting the total amount charged for the driver’s fares. Because the IRS will treat the 1099-K as gross business income, it must be included on line 1 (gross income) of the driver’s Schedule C before adjusting for the CC and Uber service fees. Uber then deposits the net amount into the driver’s bank account, reflecting the fares minus the CC and Uber fees. Thus, the sum of the year’s deposits from Uber can be subtracted from the 1099-K amount, and the difference can be taken as an expense or as a cost of goods sold. Currently, a third party operates Uber’s billing, coordinates the drivers’ fares and issues the drivers’ 1099-Ks.
Automobile Operating Expenses – Uber also provides an online statement to its drivers that details the miles driven with fares and the dollar amounts for both the fares and the bank deposits.
Although the Uber statement mentioned above includes the miles driven for each fare, this figure only represents the miles between a fare’s pickup point and delivery point. It does not reflect the additional miles driven between fares. Drivers should maintain a mileage log to track their total miles and substantiate their business mileage.
A driver can choose to use the actual-expense method or the optional mileage rate when determining operating expenses. However, the actual-expense method requires far more detailed recordkeeping, including records of both business and total miles and costs of fuel, insurance, repairs, etc. Drivers may find the standard mileage rate far less complicated because they only need to keep a contemporaneous record of business miles, the purposes of each trip and the total miles driven for the year. For 2017, the standard mileage rate is 53.5 cents per mile, down from 54.0 cents per mile in 2016.
Whether using the actual-expense method or the standard mileage rate, the costs of tolls and airport fees are also deductible.
When the actual-expense method is chosen in the first year that a vehicle is used for business, that method must be used for the duration of the vehicle’s business use. On the other hand, if the standard mileage rate is used in the first year, the owner can switch between the standard mileage rate and the actual-expense method each year (using straight-line deprecation).
Business Use Of The Home – Because drivers conduct all of their business from their vehicle, and because Uber provides an online accounting of income (including Uber fees and CC charges), it would be extremely difficult to justify an expense claim for a home office. Some argue that the portion of the garage where the vehicle is parked could be claimed as a business use of the home. The falsity with that argument is that, to qualify as a home office, the space must be used exclusively for business; because it is virtually impossible to justify that a vehicle was used 100% of the time for business, this exclusive requirement cannot be met.
Without a business use of the home deduction, the distance driven to pick up the first fare each day and the distance driven when returning home at the end of a shift are considered nondeductible commuting miles.
Vehicle Write-off – The luxury auto rules limit the annual depreciation deduction, but regulations exempt from these rules any vehicle that a taxpayer uses directly in the trade or business of transporting persons or property for compensation or hire. As a result, a driver can take advantage of several options for writing off the cost of the vehicle. These include immediate expensing, the depreciation of 50% of the vehicle’s cost, normal deprecation or a combination of all three, allowing owner-operators to pick almost any amount of write-off to best suit their particular circumstances, provided that they use the actual-expense method for their vehicles.
The options for immediate expensing and depreciating 50% of the cost are available only in the year when the vehicle is purchased and only if it is also put into business use during that year. If the vehicle was purchased in a year prior to the year that it is first used in the rideshare business, either the fair market value at that time or the original cost, whichever is lower, is depreciated over 5 years.
Cash Tips – Here, care must be taken, as Uber does not permit fares to include tips in their CC charges but Lyft does. Any cash tips that drivers receive must be included in their Schedule C gross income.
Deductions Other Than the Vehicle – Possible other deductions include:
- Cell phone service
- Liability insurance
- Water for the fares
Self-Employment Tax – Because the drivers are treated as self-employed individuals, they are also subject to the self-employment tax, which is the equivalent to payroll taxes (Social Security and Medicare withholdings) for employees—except the rate is double because a self-employed individual must pay both the employer’s and the employee’s shares.
If you are currently a driver for Uber or Lyft, or if you think that you may want to get into that business, and if you have questions about taxation in the rideshare industry and how it might affect your situation, please give Dagley & Co. a call.
2017 green light alert! Congress has approved the 21st Century Cures Act, a provision allowing small employers to reimburse their employees for medical expenses under a health reimbursement arrangement (without being liable for the draconian, $100 per day penalty for violating the Affordable Care Act’s rules).
Background: Stand-alone HRAs do not meet two key requirements of the ACA, as they:
- Limit the dollar amount of the insured person’s annual benefits and
- Fail to provide certain preventive-care services without requiring cost-sharing.
As a result, under the IRS’ interpretation of the ACA, employers are subject to a $100 per day (maximum $36,500 per year) excise tax penalty per employee.
New Law: Effective January 1, 2017, under the 21st Century Cures Act, qualified small employers that have an average of fewer than 50 full-time employees (including full-time-equivalent employees) and that maintain a qualified small-employer HRA will be exempt from the penalty. Under this act, a qualified small employer is one that:
- Employs an average of fewer than 50 full-time employees (including full-time-equivalent employees) and does not offer a group health plan to its employees. The number of full-time-equivalent employees is determined by adding up all the hours that part-time employees worked in a given month and dividing by 120.
- Provides the HRA on the same terms to all eligible employees. Eligible employees all those except:
- Those who have not completed 90 days of service,
- Those who have not attained the age of 25,
- Part-time workers (generally those working an average of less than 30 hours per week),
- Seasonal workers (generally those employed for 6 months or fewer during the year),
- Those covered by a collective bargaining unit, and
- Certain nonresident aliens.
- Entirely funds the HRA (i.e., no salary-reduction contribution is made to the HRA).
- Only reimburses the employees after being provided with proof of their medical expenses.
- Limits reimbursements to $4,950 ($10,000 where the plan includes family members) per year. Amounts are subject to inflation adjustments for years after 2016.
Any medical-expense reimbursements that an employee receives from a qualifying HRA are excluded from that employee’s income.
If you have questions regarding this new topic effective January 1, 2017, please give Dagley & Co. a call at 202-417-6640.
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A frequent question we get is : Can I deduct the cost of my work clothing on my tax return? The answer to this question is “maybe.” The IRS provides the following guidelines for when expenses for work clothes are deductible:
1) They are worn as a condition of employment
2) The clothing is not suitable for everyday wear.
It is not enough that the clothing be distinctive; it must be specifically required by the taxpayer’s employer. Nor is it enough that the taxpayer does not, in fact, wear the work clothes away from work. The clothing must not be suitable for taking the place of the taxpayer’s regular clothing. So, just because your employer requires you to wear a suit at work does not make that suit deductible, because it is suitable for everyday wear.
The following are examples of workers who may be able to deduct the cost and upkeep of work clothes: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc.). Note that those types of occupations usually require uniform-type clothing, which is generally deductible if required by the employer.
Musicians and entertainers can deduct the cost of theatrical clothing and accessories if they are not suitable for everyday wear. The IRS contends that white bib overalls and standard shoes, such as a painter might wear, are not distinctive in character or in the nature of a uniform, so they are not deductible.
Generally, when deciding whether costs to purchase and maintain clothing are eligible to be deducted, the courts use an objective test that makes no reference to the individual taxpayer’s lifestyle or personal taste. Instead, the courts in considering whether clothing is adaptable for personal or general use look to what is generally considered ordinary street wear.
For example, in a recent Tax Court case, the court held that a salesman for Ralph Lauren who was required to purchase and wear the designer’s apparel while representing the company couldn’t deduct the cost of such clothing. The court found that the clothing was clearly suitable for regular wear and therefore not deductible.
Protective Clothing – The costs of protective clothing required for work, such as safety shoes or boots, safety glasses, hard hats and work gloves, are deductible. Examples of workers who may require safety items include carpenters, cement workers, chemical workers, electricians, fishing workers, linemen, machinists, oil field workers, pipe fitters and truck drivers.
Military Uniforms – Taxpayers generally cannot deduct the cost of uniforms if they are on full-time active duty in the armed forces. However, armed forces reservists can deduct the un-reimbursed cost of uniforms if military regulations restrict the taxpayers from wearing a uniform except while on duty as a reservist. A student at an armed forces academy cannot deduct the cost of uniforms if they replace regular clothing. However, the cost of insignia, shoulder boards, and related items are deductible. Civilian faculty and staff members of a military school can deduct the cost of uniforms.
When deductible, the cost of the clothing and upkeep is considered a miscellaneous itemized deduction. However, miscellaneous itemized deductions are only allowed to the extent that they exceed 2% of your adjusted gross income. So higher-income taxpayers with no or few other miscellaneous itemized deductions may not benefit from a deduction.
Please contact Dagley & Co. if you have any questions about the deduction of your work clothing.
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