If you are self-employed or an independent contractor and you are using your vehicle for work, the mileage accumulated during your business trips can qualify for self-employment tax deductions. But what about deducting the miles from home to work?
When it comes to driving to work, the IRS has some strict rules for mileage deduction. Depending on the situation, your work-related trips may be considered as commuting, which can make them non-tax deductible.
In this article, we will go over the options you have for mileage tax deductions as well as when your transportation between your home and work can qualify for them.
Let’s start with what the IRS considers “commuting mileage”:
Transportation from your home to your main or regular place of work is defined by the Internal Service Revenue as commuting. A place of work is considered main or regular if you have been working at the same job site for at least one year.
These commutes are considered personal drives, and according to the IRS Commuting Rule, this type of mileage is not a deductible business expense, even if you make business calls or carry business supplies and products during that commute.
There are two exceptions to the IRS commuting rule, that can allow you to deduct miles from home to work. Let's review them:
Having a qualifying home office is one way to avoid the IRS Commuting Rule. In this case, because your home qualifies as your principal place of business, you may deduct the cost of any trips made to another business location.
For example, if you have a home office where you do the administrative work for your business, but also have an outside office that you use to meet clients, you can deduct all of your business trips from home to that office. This business trip would be considered a commute if you do not have established your home office.
In order to qualify for home office tax deductions, your home has to be your main place of business. This means the place where you perform most of your administrative and management tasks, have regular meetings with clients, or where you earn most of your income.
Another exception to the IRS commuting rule is when traveling between your home and a temporary work location. This means any place where you realistically expect to perform business-related tasks for less than one year.
For example, let’s say you are an independent consultant and you have your own office in a downtown building. You are hired for a project that requires you to drive to your client’s office twice a week. The project is expected to last 2 months. You will be able to deduct the cost of driving to your client’s office from home because it qualifies as a temporary work location.
For example, if you are an estate sale agent, and do not have an established office or formal business address. In this case, you are required to travel from your home to different estate sales each week. You would only be able to deduct these business trips if the homes you are visiting are outside of your metropolitan area.
There are two methods of claiming a tax deduction on your car expenses: Actual expenses or standard mileage rate. Let’s review each of them:
The actual expenses method allows you to claim deductions for all expenses related to the operation of the car. The car expenses you can deduct include depreciation, gas, insurance and repairs. In this case, you wouldn’t use the information on miles driven for business purposes, you focus on the actual car expenses.
This method can be more time-consuming because it requires you to keep track and documentation of more expenses whereas with the standard method you only need to track your business trips. If you want to use this method, you can use an app to track receipts. This will make tax season a lot easier for you.
With this method you can claim a deduction per mile driven for business purposes. If you plan on using his method to claim the mileage deduction, it is important you know how to track mileage for taxes. The set rate is changed by the IRS every year. Starting January 2021, the standard mileage rate is set at 56 cents per mile for business.
You only qualify for the standard mileage rate if you either own or lease the car you use for business. If you own the car, you must use this method for the first year of use for business purposes, then you may switch methods for the following years. If you lease, you must use the standard mileage rate for the entire lease period.
Also, you cannot use more than four vehicles simultaneously for business purposes, although switching between them is permitted.
If you qualify for both methods, and you are not sure which one to choose, the standard mileage rate method will be better for you in the following situations:
If you are going to claim a tax deduction under the standard mileage rate method, the IRS requires you to keep a thorough and accurate log for the year's business miles. Each time your vehicle is used for business purposes you have to record the following information:
You decide how you want to keep your mileage log. Update it by hand on a notebook, use a 1099 excel spreadsheet program or a mileage-tracking app. What’s important is to update your records regularly to make sure they are precise. Also, you should keep your records for a period of three years from the date on which you file your tax return.
If you need help keeping track of your business expenses, Bonsai Tax offers a wide variety of tools to help make tax season easier on you. It is built exclusively for self-employed workers and designed to identify tax deductions, track your expenses and estimate your taxes.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?