Author Topic: Self-employment mileage deduction: too good to be true?  (Read 4104 times)

ketchup

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Self-employment mileage deduction: too good to be true?
« on: May 21, 2014, 08:24:02 PM »
My girlfriend is a currently on-the-side photographer.  Lately she's been shooting a lot of dog shows, and getting pretty popular in the breeds she's focusing on.  Due to the success, she's talking about "going legit" and keeping track of everything and paying taxes for this year.  She hopes to quit her "day job" sometime this year.

If she's keeping track of mileage, let's say tomorrow she drives 175 miles each way to a show, and has a client there paying $200 for their shoot.  Can she deduct 175*2*0.56 from that $200 for tax purposes?  That works out to $4 in taxable income.  While driving my '99 Metro that costs ~$0.13/mile to drive, accounting for all expenses.  So her actual expenses are $45 for the trip, turning $165 of income into $4 of taxable income. 

Is this correct, or way off?  It feels too good to be true, and you know what they say about that...

clutchy

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Re: Self-employment mileage deduction: too good to be true?
« Reply #1 on: May 21, 2014, 08:34:04 PM »
yes business miles are deductible. 

she might consider being a bit more selective on what jobs she actually takes. 


just an FYI she can also depreciate or expense her equipment and many other things.

Primm

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Re: Self-employment mileage deduction: too good to be true?
« Reply #2 on: May 21, 2014, 08:41:16 PM »
yes business miles are deductible. 

she might consider being a bit more selective on what jobs she actually takes.


just an FYI she can also depreciate or expense her equipment and many other things.

This. Travelling 350 miles for a $200 dollar job isn't cost effective. The reason it looks like most of the cost of the job is a tax deduction is that she effectively only actually made $4 for that job, when you take out costs. It's an error a lot of sole proprietor businesses make, not counting the actual cost of doing business.

How long did it take her to drive those miles? Take actual expenses away from the $200 and divide it by the actual time she spent on the job (including post-processing) and she'll find her hourly rate is pretty low. That may be why she's so popular - she's charging almost below cost for the job.

ketchup

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Re: Self-employment mileage deduction: too good to be true?
« Reply #3 on: May 21, 2014, 09:45:20 PM »
The numbers I threw out were just an example.  Realistically of course she's making more than that.  But some of her "establishment" and "networking" trips were more like what I said, and trips like that have led to lots of exposure.  I'm just trying to get a feel for everything.  Her effective hourly rate is constantly rising. 
It's an error a lot of sole proprietor businesses make, not counting the actual cost of doing business.
For the record, I did account for the actual cost of those miles, which happens to be far less than the IRS rate.

Primm

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Re: Self-employment mileage deduction: too good to be true?
« Reply #4 on: May 22, 2014, 01:21:36 AM »
That's good then. The Tax Office rates are calculated by them to be an approximation of actual costs. If your actual spend is less than that then that's money in your (her) pocket, so good luck to you!

totoro

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Re: Self-employment mileage deduction: too good to be true?
« Reply #5 on: May 23, 2014, 08:48:57 AM »
Here you are still spending $45 to make $200 and that may or may not be covered by the tax deduction.  It is that good because you only spend .13/mile (that includes a budget for repairs? seems very low).

This non-taxable benefit really becomes useful when you can charge a client for mileage.  Instead of getting the tax deduction on your income, you get the full difference between mileage permitted and actual cost tax-free.

In my case, I charge 52 cents per km and am reimbursed this amount even though it costs about half that to operate my car.  Having a car that is not financed and was purchased used puts you far ahead here. 

This means for every 1000 km business trip I actually make over $200 tax-free.  In our case, this pays for our personal travel and our automobile ends up costing us nothing to own and operate.

Cpa Cat

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Re: Self-employment mileage deduction: too good to be true?
« Reply #6 on: May 23, 2014, 08:54:10 AM »
The simplified mileage method is meant to include gas, depreciation and all other vehicle-related costs.

It is designed to make life easier. Which, in of itself, sometimes seems too good to be true when coming from the IRS - but the calculation has a basis in IRS-land and it drastically cuts their costs of auditing/tracking this business deduction.

Along these lines, you will also find the Simplified Home Office Deduction.

ketchup

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Re: Self-employment mileage deduction: too good to be true?
« Reply #7 on: May 23, 2014, 10:23:44 AM »
Here you are still spending $45 to make $200 and that may or may not be covered by the tax deduction.  It is that good because you only spend .13/mile (that includes a budget for repairs? seems very low).

This non-taxable benefit really becomes useful when you can charge a client for mileage.  Instead of getting the tax deduction on your income, you get the full difference between mileage permitted and actual cost tax-free.

In my case, I charge 52 cents per km and am reimbursed this amount even though it costs about half that to operate my car.  Having a car that is not financed and was purchased used puts you far ahead here. 

This means for every 1000 km business trip I actually make over $200 tax-free.  In our case, this pays for our personal travel and our automobile ends up costing us nothing to own and operate.
That is a great idea.  Thank you for the info.  The 0.13/mile is a bit of an estimate, but includes everything except insurance.  Cheap car, high MPG, cheap parts, etc.  It seems low because it is low.  I bought that car with the intent of getting the cheapest per mile total cost I could.
The simplified mileage method is meant to include gas, depreciation and all other vehicle-related costs.

It is designed to make life easier. Which, in of itself, sometimes seems too good to be true when coming from the IRS - but the calculation has a basis in IRS-land and it drastically cuts their costs of auditing/tracking this business deduction.

Along these lines, you will also find the Simplified Home Office Deduction.
Yeah, my number includes everything except insurance (which is a constant regardless of miles driven past a certain point).  I did see provisions on the IRS website for tracking vehicle expenses if it works out to more than the current rate, which seems like madness.  I have no idea how that could happen with such a generous rate. We'll look into the Simplified Home Office Deduction too, thanks.

Hmm, I just thought of this: is it an issue that it's my car and she's the one deducting mileage on it, or does vehicle ownership not matter?
« Last Edit: May 23, 2014, 10:25:28 AM by ketchup »

totoro

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Re: Self-employment mileage deduction: too good to be true?
« Reply #8 on: May 23, 2014, 11:15:26 AM »
Easy, buy a new car with borrowed money and watch it depreciate dramatically in the first four years - that will drive up mileage costs dramatically. 

And yes, you do need to include insurance by estimating miles travelled per year and dividing the cost per/mile.

In Canada I don't think it matters who owns the car, it matters that it is not company-owned.

ketchup

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Re: Self-employment mileage deduction: too good to be true?
« Reply #9 on: May 23, 2014, 01:04:11 PM »
And yes, you do need to include insurance by estimating miles travelled per year and dividing the cost per/mile.
Well that adds another $0.03 per mile then I guess.  But I pay for my insurance, so I guess she wins there.

paddedhat

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Re: Self-employment mileage deduction: too good to be true?
« Reply #10 on: May 24, 2014, 08:20:09 AM »
The IRS figures are generous by our perspective, but accurately reflect situations like a sales rep. for a manufacturer, who operates a newish, American four door sedan and really can't be expected to drive clients around in a 'stachian car. In reality, encouraging a potential client to drop a major amount on your company after you take him to lunch in your 15 YO Metro, wouldn't really end well.
The only thing I would add is that, I spent many years operating various light trucks in my construction business, and it was always heavily stressed by my accountants to keep a well documented log of business miles travelled, including destination, client being billed, and starting and ending ODO readings. I'm sure it's tough to resist the urge to use a tech. solution for this, but I always used a small bound journal. My thinking is that an old work journal, that's been in the car a few years, with coffee stains and ten different ink and pencil entries, looks a lot more authentic in an audit, compared to a freshly printed spreadsheet.