*Gridwise does not provide tax, legal, or accounting advice. This material has been prepared for information purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before filing your return.
Who would think, when it comes to your car you’d want to learn how to appreciate a thing like depreciation? That old adage about a car losing a certain percentage of its value the moment it leaves the lot is true, and on its face, that sounds bad. But unless you’re planning to resell your vehicle in the near future, you can use depreciation to your advantage.
How would you do that? The amount of depreciation your car racks up each year can be deducted from your taxable income and reduce the amount you owe on your tax return. In this post, we’ll explain this thoroughly, show you the best ways to calculate and claim depreciation on your vehicle, and help you reduce your taxes!
Here's what we cover:
Vehicle depreciation: What it is and why it matters to gig drivers
Your car is an asset. Surely you noticed how valuable it is when you went to pay for it! Fortunately, the IRS also recognizes it to be an asset. This can allow you to view that lost value as you drive off the lot in a totally different way.
How does car depreciation work for tax? You can subtract the value your vehicle loses over time from your taxable income! The more mileage and wear and tear a vehicle accrues, and the more it becomes outmoded by new technology, the greater the amount of depreciation you can deduct. This is a piece of information that, as a gig driver, you can learn to thrive on. Although your car is bound to depreciate faster than average, because you drive so much, you can at least get credit for it in the form of a hefty tax deduction.
The IRS allows drivers to spread the depreciation of their vehicles over a car’s “useful life,” or the amount of time it takes for a car to lose all of its original value. In general, the IRS allocates five years for most vehicles. You might be able to get more depreciation in less time, though, depending on the method you use.
Methods to minimize tax time madness
There are two ways to get your car depreciation tax calculator up and running, via different methods of accounting for the depreciation of your vehicle. The first method is the standard mileage deduction.
What is the standard mileage deduction method?
Each year, and sometimes more often, the IRS sets a rate that corresponds to the amount you can deduct for every mile you drive while doing your driving gig. For 2023, the IRS standard mileage rate is 65.5¢ per mile. This rate bundles all the expenses you pay to operate your vehicle, from gas and registration to depreciation. If this is the first year you are using your car for business, the IRS wants you to use this method.
To use the standard mileage deduction, you will take the number of miles you drove for your gig, and any other mileage you accrued for your business, and multiply it by the standard mileage rate. Note that you must know the number of miles you drove for business and deduct only those miles. You can estimate the percentage of your total miles driven for business, but it’s far more accurate to use a mileage tracker, such as Gridwise.
Furthermore, it’s worth noting that, since you have a “home office,” you can also deduct the miles you drive to and from your driving gig. This is not the same as commuting costs, which are not tax deductible. Tracking mileage becomes especially important here, because while your driving apps record the miles you drive while you are on a trip or delivery run, they don’t count the miles you drive to and from your home base to where you begin driving for the apps.
This can become quite costly. Let’s take just one day’s worth of numbers to illustrate how this might work. Say you drove 100 miles on your shift, but went 15 miles in each direction to travel to and from your home base. Based on the 2023 standard deduction rate, you would have $65.50 to deduct according to your apps. But unless you used an app such as Gridwise to track all the miles you traveled going to and from your shift, you would have missed $19.65 in additional deductions, representing your journey to and from home base, just for that one day!
The IRS standard deduction method is good for gig drivers because of the way it pays for the many miles rideshare and delivery drivers put on their cars. But do the IRS estimates equate to what it truly costs to operate a car for rideshare or delivery—or is there a better way?
What is the actual expense method?
If your driving gig is in its second year of business or later, you can opt to delineate the allowed actual expenses related to operating your vehicle for business, tally them up, and deduct them from your taxable income. You are discouraged from using this method until your second year. Even then, it’s worth calculating your deduction by the standard mileage method and the actual expense method to see which one puts you at a greater advantage.
Why use this method? If your mileage isn’t particularly high, such as if your driving gig is in a big city where you don’t drive very far, this method might save you more money. Also, if you only do rideshare or delivery driving on a very part time basis, you may benefit from using this way of calculating your vehicle-related tax deductions.
Using this method, you need to track your expenses for
- fuel
- oil
- repairs
- ties
- insurance
- registration fees
- licenses
- depreciation (or lease payments, if your lease permits you to use the car for business)
As you can see, that’s a lot to keep track of. Fortunately, there’s Gridwise Tax Help powered by Keeper. Keeper helps you to categorize these costs, and even searches your bank transactions to identify deductible items you may have neglected to record. Keeper also lets you scan receipts, so you don’t have to worry about scrambling to find annoying little scraps of paper in your car’s console or glove box.
To use the actual expense method, you also have to determine what percentage of the mileage you accumulated over the course of the year was due to your driving gig. Then, after you total all the expenses, you use the percentage you determined to deduct just the portion of your car’s use that was dedicated to business.
Before you get that far, though, you’re going to have to know how to calculate and report vehicle depreciation.
“How do I claim car depreciation on tax returns?”
First things first: Determine the depreciable basis.
Before you begin to calculate the amount of depreciation you can deduct from your taxable income, you’ll need to determine the depreciable basis, or the total cost of your vehicle. This amounts to the cost of the vehicle plus taxes and fees paid at the time of purchase. For example, if you buy a vehicle for $17,000, and the taxes and fees were $2,500, the total depreciable basis would be $19,500.
Once again, you could only use the whole $19,500 if you used your vehicle for work all of the time. If you didn’t, you must calculate the percentage of use for business, and base your actual depreciable basis on that percentage of the total depreciable basis. This is where tracking your work mileage comes in. When you have an exact record of the precise number of miles you clocked for business use, you can easily calculate the right percentage.
Choose your depreciation calculation method.
There are two ways to calculate the depreciation of your vehicle.
- MACRS (Modified Accelerated Cost Recovery System)
This system was put into place to encourage business owners to purchase more equipment. It permits you to deduct a larger portion of your vehicle’s value in the early years of ownership. You must use your vehicle for business 50% of the time or more to use MACRS. Also, to use this method, you will need a MACRS table like this one, provided by Keeper.
Keeper’s blog post on this subject will give you step by step instructions and detailed explanations about car depreciation and MACRS. Before you file, make sure that the table you use is in line with current IRS regulations. This IRS publication describes how to depreciate property in detail. In addition to your vehicle, you may want to depreciate other items you use for business, such as your phone or computer.
- Straight depreciation
This method of depreciation is easier to calculate and must be used if you use your vehicle for business less than 50% of the time. You simply take the depreciable basis of your vehicle, and divide it out over five years, which is the expected useful life of the asset. This article from Motley Fool describes this method and also gives step by step instructions.
Get the right forms.
IRS Form 4562 must be used to report depreciation on your vehicle and other equipment. The form may be filled online, or you can print it and complete it manually.
Note that if you’re depreciating an SUV, truck, or other heavy vehicle, different rules apply. These regulations, and other ways of taking deductions, are special case strategies.
Special case car depreciation tax deduction strategies
Section 179 of the IRS code allows for accelerated depreciation. To maximize your write-offs in the first year of using your vehicle, you can use this method by simply deducting the entire cost of the vehicle. This could be quite advantageous if you intend to use your car for only one year. It can also offer a boost to your take-home pay in your first year of business, giving you time to get your driving gig up to full speed.
Just like with MACRS, you must use your vehicle 50% or more of the time for business to qualify for accelerated depreciation under Section 179. For 2023, the maximum deduction allowed for a car is $10,200.
If you own an SUV or another vehicle weighing 6,000 pounds or more, the maximum deduction allowed under Section 179 beginning in 2023 is $26,200, and the 50% usage rule applies. If you purchase an even larger vehicle, weighing 14,000 pounds or more, or have a vehicle that is modified to seat just a driver with a cargo section, you may be able to deduct 100% of your vehicle’s cost in its first year. This article from Block Advisors provides further details.
Bonus depreciation is another incentive for business people to buy more equipment, and it can add to your deduction. Until recently, businesses used bonus depreciation rather than Section 179. Beginning in 2023, bonus depreciation amounts will get progressively lower, as this form of depreciation is phased out.
For 2023, however, you can still get a rather substantial first-year deduction by combining Section 179 and bonus depreciation.
If you’re curious about all the ways the IRS allows you to deduct from your income based on the business use of your vehicle, take a look at this IRS document. You can also learn more in this Gridwise post on how to choose your mileage deduction method.
Keep more of your money with expert help
Knowing what you can deduct, and how to do it, can really help you hold on to your hard-earned cash. As you can see, one of the things you’ll need to do is keep solid records of your mileage and expenses, so you will be able to document your claims when it comes time to take all those deductions.
Gridwise is the best mileage tracker for gig drivers, because it logs every mile you drive on every shift. All you need to do is start tracking when you begin driving, and Gridwise will do the rest.
Ready to take your gig work to the next level?
Download Gridwise, the app that helps you track your expenses and maximize your earnings
Gridwise Tax Help powered by Keeper is a service you can’t afford to be without. Designed just for gig drivers by tax experts, this powerful app not only tracks your expenses, it helps you to find them!
Simply link Keeper to your bank account, and the app will search your transactions for items you can deduct. Remember, depreciation is only one thing you can subtract from your taxable income. You can also include items you might not have thought of, as listed on the Keeper blog.
These include
- delivery equipment
- subscriptions to music services
- refreshments for passengers
- car washes and detailing
- productivity apps—like Gridwise!
Remember, Gridwise users receive 30% off the Keeper app, and Gridwise Plus users get 50% off! The winning combination of Gridwise and Keeper is sure to make it easier for you to keep more of your money, and after all, that’s why you do gig driving in the first place!
