Tips on Tax Deductions for UBER and LYFT Drivers

If you are a driver in the ridesharing business, this is what you should know about taxes. Deducting your Uber or Lyft service expenses is crucial to your financial success. The key is keeping good records. So, what kind of expenses can you deduct? Let's put this answer in three parts.

Part One. You can deduct the mileage you drive from the time you start driving in search of a passenger until you return home in one of two ways:

• using the standard mileage method, you can tax deduct 57.5 cents (2020) per business mile you drive, or
• using the actual expense method, you can deduct the actual cost of gas, repairs, depreciation or lease payments, and more. Obviously, this method is more record intensive.

Either method means you must track your business driving mileage. The easiest and most accurate way to do this is to use your smartphone with a mileage app like MileIQ. Or, if you have a lot of time to burn and like to use a pen and paper, you can use a written mileage log.

Part Two. Other things beyond auto expenses an Uber or Lyft driver can tax deduct are:

• a smartphone used for business—this is the only way Uber and Lyft and other ridesharing businesses work. If your phone is also used for personal things, only the business use portion is deductible. The more you drive, the bigger the deduction. You will need to track your business phone usage for this deduction.
• giveaways for your passengers, such as water, maps, and snacks
• car insurance and interest on a car loan (for users of the actual expense method only). The deductible amount is based on the car's business use percentage.
• Uber or Lyft fees and charges
• home office expenses. Most people don't think of this one. But as long as you qualify under the tax rules and use a portion of your home regularly and exclusively for your driving business (for example, recordkeeping), you can deduct home office expenses for that portion of your home.
• parking and tolls—these are not reimbursed by your passengers
• PayPal or credit card transaction fees
• accounting and tax preparation software or fees paid to preparers for work related to your ridesharing biz
• and more, such as business cards, ads, and signs.

Part Three. All the deductions listed in Part 1 and 2 are great, but, thanks to the Tax Cuts and Jobs Act (“TCJA”), you can qualify for a pass-through tax deduction starting in 2018. Virtually all Uber and Lyft drivers operate as pass-through businesses—that is, any business in which the profits are taxed on the owner's individual tax return at his or her individual tax rates. Most Uber and Lyft drivers are sole proprietors (a one-owner business in which the owner personally owns all the business assets); a few have formed limited liability companies or S corporations. All such drivers are operating pass-through businesses.

The TCJA allows owners of such pass-through businesses to deduct an amount equal to up to 20% of their net income from the business. This is in addition to all their other business deductions. The pass-through deduction is a personal deduction pass-through owners can take on their returns whether or not they itemize. For example, if you earn $50,000 in profit from your Uber or Lyft driving, and qualify for the pass-through deduction, you may deduct $10,000.

However, you're entitled to the full 20% pass-through deduction only if your taxable income from all sources after deductions is less than $326,600 if married filing jointly, or $163,300 if single (2020). The 20% deduction is phased out if your income exceeds these limits. It disappears entirely for marrieds filing jointly whose income exceeds $426,600 and for singles whose income exceeds $213,300 (2020).

If your income is over the $213,300/$426,000 thresholds, you can still qualify for a deduction, but it is subject to a special limit: Your deduction can't exceed the greater or (1) 50% of your applicable share of the W-2 employee wages paid by your business (which will likely be 0); or (2) 25% of the your share of W-2 wages, PLUS 2.5% of the original purchase price of the long-term property used in your driving business—for example, any automobile and other equipment used in your driving business. For example, if you have no employees and you use a $25,000 car for your business, you'd be entitled to a $625 deduction (2.5% x $25,000 = $625).

This deduction began on January 1, 2018 and is scheduled to last through December 31, 2025.