The end of the year will be here before you know it. Now is the time to double check that your books and records are in order before tax time arrives.
As a rideshare driver, you may be wondering what type of information you need for tax purposes, including deductions that may be available to you to help reduce your tax burden. We’ll explore why bookkeeping is so important and steps you can take now to ensure that you are prepared come tax time.
WHY IS BOOKKEEPING SO IMPORTANT?
Bookkeeping for your business is important as it allows you to make sound financial decisions related to your company. You will be able to determine whether your business is growing and identify opportunities for improvement.
In addition, you can also analyze your expenses, identify your larges expenditures, and determine whether you can streamline your expenses and save money.
For year-end planning purposes, proper bookkeeping captures your financial history in one central location. This helps to save time and reduce stress rather than scrambling to find all of your receipts, invoices, and other financial documents at year-end.
AS A RIDESHARE DRIVER WHAT KINDS OF DEDUCTIONS MIGHT I BE ELIGIBLE FOR?
As a rideshare driver, there are two methodologies for determining your expenses for tax purposes: the standard method and the actual expenses method.
The standard method uses a fixed amount per mile driven, as the value that can be deducted on your tax return. For 2020, that amount is 57.5 cents per mile driven for business purposes.
Actual Expense Method
For the actual expense method, you would need to track all of the business-related expenses you incurred during the year. This includes expenses related to the operation and maintenance of your vehicle, insurance costs (for both your vehicle and personal health), communications related costs (including internet and phone costs), commissions and fees paid to ride sharing services, legal and other professional fees, among others. Examples of miscellaneous costs include bank chargers, office supplies, roadside assistance plans, and many others.
The deductibility of these expenses will be based on the percentage the vehicle is used for business purposes.
Careful bookkeeping will help you to track this information, making it much easier to identify the deductible expenses.
WHAT SHOULD I BE DOING TO PREPARE FOR YEAR-END?
If you have not done so already, you should begin the process of gathering and organizing your invoices and receipts. If you have not done so already, you will want to enter this information into your accounting software or spreadsheet to begin categorizing your expenses.
You will also want to reconcile your bank statements to your financial data to ensure all applicable transactions have been captured.
If you have made business purchases with cash or inadvertently used personal funds to make business purchases, be sure to identify these transactions, save the receipts, and ensure that this information has been recorded in your bookkeeping system. An organized bookkeeping system makes it easier to keep your business and personal financial matters separately which benefits your business from both a financial and legal obligation perspective. Commingling business and personal accounts can put your personal assets at risk.
Now is the time to look at your accounts receivable balance to identify any outstanding receivables that might be considered to be a bad debt expense so that they can be written off.
A bookkeeper would be able to help you to identify these types of transactions and ensure that they are properly recorded.
Whether you are a full-time rideshare service or you only work part-time, it is crucial to understand the rules regarding business tax deductions along with other incentives that might be available to you.
Even if you have a full-time job in addition to your ridesharing business, you may still be required to make estimated tax payments on the income that you earn. Your ridesharing services will typically provide you with a 1099-MISC (for earnings of $600 or more) or 1099-K (for earnings of $20,000 or more) in addition to an account summary reflecting your earnings throughout the year. This is usually provided once the tax year is closed, which is to late to do any proper planning.
Keeping your own books allows you to make estimated tax payments as required and stay in the good graces of the IRS.
Keeping track of all of the necessary documentation and recording your financial transactions can be overwhelming for busy entrepreneurs.
A bookkeeping professional can help to alleviate the burden, freeing you to focus on running your business.
If you have any questions about year-end planning tasks for ride sharing business owners or you would like to learn more about my services, please feel free to contact us for more information.