Do you client have a “side hustle” going on in addition to their full-time job? If you qualify, you may deduct certain expenses incurred by the self-employed business, including costs attributable to your vehicle.
The recent Tax Court case Gonzalez, TC Summary Opinion 2022-13, 7/18/22 found that it is indeed OK to deduct vehicle expenses related to a side-gig, as long as the filer follows strict rules.
Generally, expenses relating to use of a car, van, pickup or panel truck used for business are deductible. For example, if they drive their own passenger car to visit clients or customers, they may write off the portion of their vehicle’s costs that is attributable to business use, subject to some special limits. If they use their car 80 percent for business, they can deduct 80 percent of the costs.
The vehicle expenses are deductible under one of two methods:
1. Standard mileage rate: This is a flat rate adjusted by the IRS at least annually. For 2022, the deduction is 58.5 cents per business mile for the first half of the year and 62.5 cents for the second half. Also, they can add in business-related parking fees and tolls.
2. Actual expenses: Alternatively, they can deduct actual expenses based on the percentage of business use. This includes gas, oil, insurance, repairs, licenses, tires, etc., plus a generous depreciation allowance.
The actual expense method often provides a bigger deduction than the standard mileage rate. However, they must keep receipts, invoices and other documentation to show costs and establish the identity of the vehicle for which the expenses were incurred. For depreciation purposes, they must show the original cost of the vehicle and any improvements, as well as the date it was placed in service.
The IRS has issued detailed regulations covering the substantiation of vehicle expenses under the actual expense method. The best way to secure a deduction is to keep a contemporaneous log or comparable record of expenses and business use.
Facts of the new case: The taxpayer, a resident of California, had a full-time job at Stanford University. After moving to Palo Alto, she started a small clothing design business in Los Angeles.
During the year at issue, the taxpayer traveled to a patternmaker workshop in Los Angeles and Inglewood in southern California approximately every other weekend. She made the 800-mile round-trip by car. Although the taxpayer stayed with family and friends in the area during these trips, the primary purpose of the travel was business-related.
At trial, the taxpayer submitted a mileage log detailing the dates traveled, distances traveled and the purpose of each trip. She also submitted vehicle service receipts corroborating the miles driven. The taxpayer testified credibly as to the business nature of her trips.
End of the road: The Tax Court determined that the taxpayer has satisfied her burden of proof for substantiating vehicle expenses. Accordingly, it approved a deduction of more than $12,000 for vehicle expenses for the year at issue.