Rule 1: Keep accurate records. Maintain a trip or mileage log to record your vehicle usage. There are apps available that can help you keep track of your mileage – Mile IQ and QuickBooks Self- Employed both offer mileage trackers.
Rule 2: Allocate business/personal use. You will need to keep track of both the number of your business and personal miles driven. One way to do this is to record your business mileage and subtract it from your total annual mileage shown on your odometer for the year.
Rule 3: Choose a deduction method You can use the standard mileage method or the actual expense method. You will want to select the one that gives you the larger tax deduction. It is a great idea to run the numbers using both method and then pick one. Keep in mind that there are some limitations to switching back and forth between methods.
Let’s look at some of the differences between the standard mileage method and the actual expense method quickly.
What is the standard mileage method?
This method requires you to calculate the total of miles you’ve driven for your business and multiply it by the standard mileage rate. The standard mileage rate for the 2021 tax year is 56 cents per mile. So, if you drive a total of 5000 miles for your business or freelance work, you may qualify for a business tax deduction of $2800.
How do I know if I can use the standard mileage rate?
To be able to use this method, you must:
Be sure to note that you cannot use this method if:
But if you use this method, there are some things you can’t deduct, like:
Now, how about the actual expenses method?
The second method you can use on your taxes is the actual expenses method. And you want to use this method if you are not able to use the first method or if you simply just want to use it.
However, you must use this method if you have a fleet of vehicles for your business, have used standard mileage rate for your leased vehicle, or you’ve used the actual expense calculation when your car was first bought for business. You cannot switch methods.
Here are some deductions you can make using the actual expenses method:
You can only deduct the same percentage on your taxes that correlates to how much it was used for your business. So, for instance, if you used it for business 70% of the time, you can only deduct up to 70% on your taxes..
1. Payroll Set-Up and State Tax Registration (SIT/SUI): If your clients are a new business and are planning on hiring employees in their home state or other states, they will need to register for payroll taxes in each of those states.
2. Foreign Qualification Filings: If your clients are planning to operate or expand their corporation or LLC into other states, they will need to file for a foreign qualification to stay compliant.
3. Annual Reports Filings: If your clients fail to file a required annual report, they are likely to fall out of good standing and face fines and penalties; reminding them of such important due dates and deadlines is critical before the New Year.
4. Dissolutions and Withdrawals: If your clients are ceasing operations completely, you should be advising them to properly dissolve their company. If your clients are not ceasing all business but are no longer doing business in a state or states in which they were foreign qualified, this is the time to advise them to properly withdraw from those states to prevent them from having to pay additional filing fees and filing taxes for the New Year.
5. Amendments, Conversions, and Modifications: If your clients have made changes this past year to the information set forth in their Articles of Incorporation (Corporation) or Articles of Organization (LLC), or wish to convert their business entity (Ex. from an LLC to a C Corp or vice versa) they are required to file documents with the state of formation, in addition to, the states that they are also foreign qualified in.