Suppose I have a small consulting business and use my car for local travel. The car is not exclusively for the business; I do not depreciate the car as a business asset. What is the correct handling of this? Am I entitled to book an expense for use of the car? If so what is the offsetting entry?
I know that I can deduct mileage on my taxes, but this is not a tax filing question, it’s a GAAP question.
You should consult with a tax accountant but I believe you can deduct expenses per the GSA reimbursement rate including some proportion of normal maintenance costs if you can show that you consistently use the vehicle for business purposes X percent of the time (not commuting to an office but actual for-work travel). Unless this and other deductions push you over the standard deduction, however, it really isn’t worth it. I don’t believe you can charge expenses ‘to’ the car unless it is legally owned by another entity that collects payment.
Be aware that if you are using a vehicle for business purposes other than personal transportation from/to work sites, i.e. to conduct sales calls, transporting equipment, et cetera, your automotive insurance probably doesn’t cover this use and you may be obligated to purchase additional insurance for that purpose. Generally speaking it isn’t as if anyone checks this unless you get into an accident but it is technically grounds for your insurance to deny a claim.
Stranger
As background, complicating matters is that this is for music performances. For the first time I am going to get a 1099 for this. I am undecided as to whether to treat this as self-employment or hobby income. If it’s hobby income I cannot deduct any expenses, but I also don’t have to pay self-employment tax. Driving to gigs can be a significant expense (Saturday I drove 100 miles round trip plus $15 in tolls, and got paid $70 for the gig).
I may end up consulting a tax professional but I have never needed to use one before and that could get expensive relative to the amount of money involved.
Who’s issuing you a 1099?
If it’s a 1099-NEC (non-employee compensation), I believe you must report the income as self-employment. Whoever issued you the 1099-NEC will be reporting your income to the IRS.
This is solely based on my experience as a volunteer tax preparer.
The mileage deduction ($0.585 per mile in 2022) is your offsetting entry.
Speaking as someone who has had a lifetime of side-gigs and freelancing, as well as being married to an entrepreneur, inventor, and professional musician doing a ton of gigs/freelancing… talk to a tax professional. Yes, you will have to pay for the expertise but it could wind up saving you thousands and thousands of dollars.
I spend about $150-200 on a tax professional a year. It more than pays for itself.
If this $70/1099 gig is the only one you’ll ever have then OK, don’t use a tax guy, but if you’re doing this a couple times a year consult with a tax pro at least once, they can help you with proper bookkeeping, record keeping, and accurate/required reporting after which you might be able to do this yourself, but with far more assurance you won’t run afoul of the IRS.
I have often found that paying for an hour of a professional’s time is cost-effective, as it saves me considerable money and aggravation over the long run. YMMV, I am not a professional of that sort, and you are certainly not obligated to follow my advice. It’s up to you.
I have nine gigs booked this year at a restaurant for brunch. The restaurant pays the leader by check, and the leader pays me. The restaurant issues the leader a 1099. If my pay is $600 or more for the year, which it will be, the leader will also issue me a 1099.
The $70 gig was all cash off the books so no 1099 for that.
But that is a not a credit entry, it’s a line item in my tax return. I need to credit an asset to offset the expense debit. If I used the car solely for business purposes then I could just expense all the depreciation, gas, and maintenance. But that’s not the case.
I am not a professional musician. I expect to make a total of maybe $1200 dollars this year playing music.
I’m going to once again suggest you consult a professional in tax matters so you properly submit the required paperwork and taxes.
If you mess up best case is a stern letter from the IRS saying “don’t do that again” (I speak from experience). But results are not always best case and worst case can be far more costly than a brief consultation with a professional.
If you are getting paid for it you are a professional. Don’t sell yourself short.
If you’re making $1200/year at it you’re making enough to have to declare it on your taxes and fill out the paperwork.
One more time: consult a professional. That person can look at your individual situation and give you solid advice based on where you live (because state taxes are involved as well as Federal) and where you work (having worked across a state line myself this can get complicated). This person can also discuss record keeping for claiming the mileage deduction and depreciation on your car and any other equipment or supplies vital to your small scale business (which is in fact what you have).
I certainly can’t force you to do the above, but I have known many people in my life who have a small “hobby business” that grew large enough to attract IRS attention who failed to properly cross the t’s and dot the i’s who wound up paying a LOT of money to the IRS in penalties and back taxes, in some cases being locked into decade-long payment programs. The IRS will not help you resolve any problems that might arise and they sure as hell won’t help you reconstruct your expenses from years ago.
I started having someone else do my taxes about 30 years ago and over the long run it has saved me thousands of dollars, and cost me no more than $200/year. That’s not just getting the 1040 paperwork done, it’s also included record-keeping advice and finding/tracking deductions. Calling or e-mailing someone to ask a few questions about current laws regarding reporting and deductions will probably cost less than that.
If you decide to do it all on your own then good luck, I sincerely wish you the best, but be careful whose advice you take and your sources of information.
I am going to echo the excellent advice offered by @Broomstick.
If you google “if i received a 1099-nec” you will have access to a lot of information. Perhaps a good place to start.
I will certainly consider this good advice. I just don’t want to spend $200 to save $100.
I probably should have said “I am not a full-time musician”. I do not depend on it for income, and until this year the income I got was pretty much a wash against expenses.
We used Tax Slayer software for the volunteer tax preparation service. When we entered a 1099-NEC, it automatically created a Schedule C, which is where you can enter all expenses, including mileage. I believe that you’re going to have to pay self-employment tax, so any expenses you can claim will reduce your tax liability.
Do you have debt associated with your small consulting business for which the lender needs to see a full set of financial statements? If not, then why do you need a set of GAAP financial statements.
Definitely sounds more like a tax bookkeeping issue.
I’m trying to learn something. I may not need financial statements. Treat this as more of a hypothetical.
You don’t credit an asset. What asset do you have to credit?
Yes, you could expense the depreciation, gas, and maintenance on a pro rata basis. Instead, just expense the mileage deduction in lieu of all that bookkeeping.
From one who has done this, it works pretty much the same, that line offsets income, basically you were denied personal use of the car’s value by using it for business. Your personal ownership and maintenance of your car is the asset you are drawing on and why you can recover against. It is designed to be a easy, acceptable and quick way to avoid the more complex process you are attempting to do, but if you chose you can still do it the way you want and in some cases you will come out ahead (especially with newer more expensive cars).
Of course you do. If I buy pencils for my business, I credit Cash (Asset) and debit Office Supplies (Expense).
And the question you asked is exactly my question.
For 1200 bucks, I think you’re making this far more complex than it needs to be. I’m not sure why you think you need to keep detailed books of accounting for this side gig. The IRS certainly doesn’t require such detail when filing taxes. Keep track of your mileage and other expenses (including pencils) and you’ll be fine. For 1200 bucks, the IRS is not going to audit your return.
Here’s a real-life example that appears to be very similar to yours: One of our clients for whom we prepare taxes is retired and lives on her Social Security income. She is also a fine piano/organ player and supplements her income by playing at funerals held at a local mortuary. The funeral home pays her a fee for each funeral and issues her a 1099-NEC each year. She reports that as self-employed income and pays applicable taxes on that income. Her only expense is the miles driven from her house and back for each funeral. Last year, IIRC, the amount reported on her 1099 was close to a thousand bucks.
This is just a guess- but it seems like what you are asking is which asset you should credit. That’s an accounting question. But in post number 3, you mention that you will be receiving a 1099 and may end up consulting a tax professional , which seems as though you have tax questions.
I think the first thing you need to do is decide if you are looking for accounting advice or tax advice or both. The IRS doesn’t require that you use double-entry bookkeeping for all self- employment* - they do require you to keep records that accurately show your gross income and expenses , but that’s a different issue.