RelayRides blogger Eric Rosenberg explores methods to save money on your taxes by deducting auto expenses as a RelayRides car owner*.
*But to be clear, this is NOT tax advice. Seriously, NOT tax advice. Please consult a professional for your personal tax situation.
One of the biggest benefits of using RelayRides as an owner is the income you earn by renting your car. As you’re no doubt aware, income may be subject to taxes. One way to minimize your tax bill is to ensure you take advantage of all your legally allowable tax deductions, which may include certain car-related expenses when you use your car to make income.
What is a Tax Deduction?
For starters, let’s answer the most basic question. A tax deduction is an IRS allowed method to reduce how much income tax you owe to the government when you file your tax return each year. Deductions are one of the most common means of reducing your taxes for typical individual or family taxpayers.
A deduction can be used to offset your income, thereby giving you a lower taxable income. As a simplified example, if you earned $50,000 in 2013, and had $5,000 in eligible deductions, your adjusted income would be $45,000 for tax purposes. If you are a single filer (not married), your federal tax rate in this circumstance is approximately 25%. Without deductions, your total tax bill is $12,500. With a $5,000 deduction, your tax bill would be $11,250, which is $1,250 lower.
Each taxpayer qualifies for a standard deduction of $6,100 in 2013 if you are single, or $12,200 if you are married filing jointly. If your total eligible deductions are lower than that amount, you can simply use the standard deduction as your personal tax deduction. If it is higher, you may be able to file an itemized tax return to lower your tax bill further. Please note that this is a simple example, and many other situations exist, including the potential application of Alternative Minimum Tax.
How Does RelayRides Let Me Deduct More?
When you sign up for RelayRides and start earning money, the IRS may treat your income as if you own a small business. At the end of the year, if you earned more than $600 in 2013, RelayRides will send you a 1099, which includes a summary of all of the income you earned from renting your car during 2013. The income you earn from renting your car is taxable at the rate determined by your Federal and state income tax bracket level. (Please note you have to pay taxes on the income even if you don’t receive a 1099.)
I know, right now you are thinking, “this looks like it costs me more money, not less!” Here’s the fun part, where you get to save.
What Can I Deduct?
Now that you are a small business owner, you qualify to deduct any related business expense allowed by IRS guidelines. You will enter your business income from your 1099 and all of your expenses you calculate using the steps below on a form called Schedule C, which is added on to your regular 1040 you file each year.
The method we use to calculate deductions requires tracking all of your car expenses and keeping all of your receipts related to the car you are renting with RelayRides.
Line Item Deduction Method
First, collect all of your receipts related to car expenses. You can also track your spending using a program like Mint.com or a free online option like Personal Capital, but you’ll still need to keep receipts. You can include anything in the following categories:
- Scheduled maintenance (includes oil changes, tire rotations, air filters, and more)
- Repairs (includes engine or transmission maintenance, tires, and more)
- Auto insurance
- Parking if expense is 100% related to RelayRides rental
- Cleaning and car washes if 100% related to RelayRides rental
- Registration and fees charged by your state, city, and/or county
- Depreciation of car value
To calculate the deprecation of your car, which is tax lingo for loss of value, you will need to follow IRS rules on depreciation. You will need the cost basis of your vehicle (the lower of how much you paid for the auto or the FMV on the date you started using it for business) and can create a depreciation schedule based on one of a few different IRS approved methods. If you have any questions about this, it is best to ask your accountant.
Next, calculate how many miles your car was driven during the entire calendar year from January 1st to December 31st, then calculate how many miles were driven by renters. Divide the miles driven by renters by the total miles driven during the year. That percentage of miles driven by renters is going to be used in the next step. For example, if your car was driven 10,000 miles in 2013, and 5,000 were by renters, your percent driven by renters is 50%.
Now, add up the total of costs of maintenance, repairs, insurance, registration, fees, and depreciation. Multiply that by the renter miles percentage and write that number down. If your total costs were $10,000 and your renter miles percent is 50%, your total here is $5,000.
Next, add up any expense 100% related to renting your car, like cleaning and parking. Add that to the number you calculated in the last step. For example, if you paid $20 in airport parking and had two cleanings that cost $25 each 100% related to renting, your total here is $70. Remember, each dollar counts, so don’t skip the small amounts. Your total now would be $5,070, which is the amount you can deduct on Schedule C against your RelayRides income.
One other deduction I should mention is deducting the lease costs if the car you are renting out it leased—we should note that lessees should first check the stipulations of their lease before renting their car out. A percentage of your lease cost may be deducted in a similar manner as noted above, but the deduction is reduced for autos with a value in excess of $19,000 (leased auto inclusion).
The Bottom Line
In our example above, the car owner could deduct $5,070 using line item deductions on Schedule C. Who knows, maybe you will be like RelayRides member David Salinas who made money renting two cars near his home in Florida.
Remember, if you have any questions, you should ask your accountant or a tax professional to make sure you follow all of the rules and don’t get in trouble or end up owing more.
Disclaimer: The information included in this post is intended to provide education on a potential financial savings to a broad segment of the general public. It does not constitute tax, investment, legal, or business advice. Neither the author nor any member of the RelayRides staff is a licensed tax or financial advising professional. If you have questions or are applying this to your personal situations, you must contact a licensed tax professional.