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Can Your Car Payment Be a Tax Write-off?
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Can Your Car Payment Be a Tax Write-off?
For a lot of freelancers and gig workers, your car is your life. When you work as a delivery driver, you pretty much live in your car, and if you're an independent contractor, you probably spend a significant amount of time driving from one job site to another. So it's only natural to assume that your car payment can be considered a business expense and to think you can claim your car payment tax on taxes you paid on your annual tax return.
It's natural for freelancers who use their cars to expect to claim a car tax write-off on their 1099 tax. But if you bought a car and are making monthly payments, or you're leasing a car, the payments are not actually tax-deductible. But there are still car-related business expenses that you can write off and save significantly on your taxes. An estimated income tax calculator is a good tool that can help you with this and make quarterly tax payments on time.
Key takeaways:
- Your car loan payments may not be fully tax-deductible
- There are car-related expenses that you can write off from your taxes
- Including your car as a business expense opens the door to several other forms of tax deductions
Table of contents
Car loan interest...Read more
Standard Mileage method...Read more
How does the standard mileage method actually work?...Read more
Should you use the standard deduction method?...Read more
Let's get back to writing off that car loan interest...Read more
Who should use the actual expenses method?...Read more
Using FlyFin for the actual expense method...Read more
Car loan interest
The majority of freelancers who use a car for their business use their personal vehicle. If you drive for Uber, for example, and you financed the purchase of the car you use, the interest you pay on your car loan is a vehicle tax deduction. So, although your monthly payment may not be a write-off, the interest you pay in a given month is, as are many other Uber-related expenses.
It works in the same way as other vehicle tax deductions, like gas, car repairs or any expense you would enter on Schedule C of your 1040 tax return. The IRS gives you two ways to deduct car loan interest: the standard mileage method and the actual expense method.
Standard Mileage method
This method rolls all your deductible car expenses into a mileage rate that the IRS sets each year. It's simpler than the actual expenses method, but generally you save less on taxes. With the Standard Mileage method, you don't itemize each vehicle-related expense on your tax return but simply write off the mileage rate amount for every mile you drive while working for Lyft.
In 2022, you can write off $0.585 per mile during the first half of the year and $0.625 from July until the end of the year. In 2023, the IRS increased the rate to $0.655.
Tips for using the Standard Mileage method
How does the standard mileage method actually work?
Say you recorded mileage for 1,300 trips while driving for Lyft in 2022, and 600 of the trips were before July 1, 700 after. You would apply the $0.585 per mile rate to the first 600 trips and the $0.625 rate to the next 700. On top of that, you spent $2,400 on parking, buying new license tabs for your car and getting car washes.
These three amounts together would make up your entire standard mileage deduction, which you'd record on Schedule C of your tax return.
Should you use the standard deduction method?
If you do a ton of driving for work, as you would if you worked for Uber or for a delivery service like Doordash, the standard deduction might save you more on your tax bill, but in most cases, the actual expenses method will lower your taxable income even more because there are so many deductible expenses available in so many categories. This is especially true if you're a more typical freelance or self-employed person who works from a home office, for example.
Find out more about which is best for you in our breakdown of the standard mileage method vs. actual expenses.
Let's get back to writing off that car loan interest
Write-offs like this are only possible with the actual expenses method, which allows you to deduct any car expense that's directly related to your self-employment work. This includes the interest from your car loan.
Here's how that works. Most freelancers use the same vehicle for personal use and work use. The percentage you use for work is the one that will affect your taxes because you can apply it to all of your car expenses. It already seems complicated, right? But the formula is actually simple.
If 60% of the time you use your car is spent driving for Uber, you can deduct 60% of your car loan interest or any other car tax write-off. That means car repairs, gas, oil changes, new wiper blades and even your cellphone bill, if you use it for rideshare driving, can all qualify as business expenses.
Who should use the actual expenses method?
It's clear that the actual expenses method generally saves more in self-employment taxes than the standard mileage rate with the exception of like rideshare drivers and truckers.
To use this method, record-keeping becomes even more important because you need to know exactly what you spent on everything from that last interest payment to the last time you were at the pump. Fortunately, there are apps like Flyfin that use A.I. to track every business expense, including car expenses, automatically 24/7 to find every possible tax write-off.
Using FlyFin for the actual expense method
If you're working as a freelancer, whether you're receiving a 1099 from Uber or working from home as a graphic designer, FlyFin makes taxes for self-employed individuals effortless. From finding tax deductions year-round to offering round-the-clock tax expert support for any questions freelancers have, FlyFin takes 95% of the work out of freelancer taxes and provides 100%-accurate state and federal tax filing at tax time.
What’s FlyFin?
FlyFin caters to the tax needs of freelancers, gig workers, independent contractors and sole proprietors.
But anyone can file taxes through FlyFin! FlyFin tracks all your business expenses automatically using A.I. technology.
Then, our CPA team files a guaranteed 100% accurate tax return for you – to save you a couple thousand dollars and a ton of time on your taxes.
In addition, you can download the FlyFin app and have your taxes filed in less than fifteen minutes, saving time and money.
Expert tax CPAs ensure 100%-accurate tax filing
A.I. finds every tax deduction, eliminating 95% of your work
On average users save $3,700
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