1099 Taxpayers: Vehicle Expenses or Vehicle Mileage
By Tim Frye
As a tax preparer you are relied on by the general public to understand the tax code and it’s nuances. As much as this seems like an impossible feat, it is within the realm of reality to at least keep up with its foundational aspects and remain cogent as to it’s applications. One area of taxation that allows you as a professional to flex your preparer muscles is when your client is an independent contractor. This type of taxpayer has income that is subject to the self-employment tax, and that means their deductions are of even more value. One of the biggest deductions available to the independent contractor is usually their driving expenses. There are a couple different ways to expense out the miles your client drives for work. This article will seek to define the two main methods in deducting business driving expense, and will offer an objective comparison as to which is better for which taxpayer.
Ordinary and Necessary
Let us keep in mind as preparers that in order for a work expense to qualify for deduction from income, it must be classified as ordinary and necessary. Ordinary, as defined by the IRS, means the expense must be considered normal for the taxpayer’s profession, and other workers in their profession would have like-kind expenses. Necessary, to the IRS, means the expense must be incurred in order for the taxpayer to get a paycheck. So any work mileage, in order to qualify, must strictly be undertaken for work purposes.
Claiming Actual Vehicle Expenses
One of the ways independent contractors can write off their business transportation costs is to claim the actual expenses to the vehicle. This would include but is not limited to gasoline, repairs, tires, maintenance costs, and depreciation, provided the car is designated to be in business use for more than a year. This method of deduction is appropriate when the taxpayer has incurred exorbitant costs from repairs and maintenance, for example purchasing new tires due to wear and tear. The comparison should be made by the tax preparer as to whether it is better to claim mileage or actual expenses.
Claiming the Mileage Deduction
The other way for an independent contractor, or an employee for that matter, to claim the deduction for business vehicle expense is to write off the miles driven at at rate of 55.5 cents per mile for the tax year of 2012. This is often the most utilized deduction for those 1099 workers who rack up work mileage because of it’s tremendous value. If the independent contractor drives a ton for work it would be wise to advise them to take the mileage deduction on the Form 2106. The mileage deduction can provide a powerful punch against taxable income that remains after all the appropriate deductions are applied.
Ultimately, it is your job as the tax preparer to advise your client on which method will provide the most potent work driving deduction. This is where you, as a preparer, sit back, take your time, and fully evaluate which method would be the best to implement. These situations are the ones that separate you from the rest of the tax preparer crowd and can build your client’s confidence in your tax preparation skills. The more you are able to measure, compare and contrast, and calculate the appropriate deductions that are applicable to your client, the more confidence you will have. With these preparation skills, the clients will be lining up out the door and into the parking lot to get to sit down with you, and they will pay you well for your time.