*With tax season ramping up, here’s an easy-to-understand breakdown of how (and what) you may be able to claim from your Turo car rental business. That said, this is NOT tax advice. Seriously, NOT tax advice. Each person’s tax accountability is unique, so please consult a professional for your personal tax situation.
**Editor’s note: We had initially posted this with dated information regarding the income threshold for 1099s. The numbers have been updated as of Feb 26, 2016, and we sincerely apologize for the misprint.
One of the biggest benefits of renting out your car on Turo is the income. But, as you’re no doubt aware, income may be subject to taxes. One way to reduce your tax bill is to take advantage of all your legally-allowable tax deductions, which may include certain car-related expenses when you use your car to earn income.
As we’re sure you know, however, each person’s personal tax situation is different and nuanced, depending their state of residence and their particular rental scenario, so please understand that the following is hypothetical and purely educational.
What is a tax deduction?
For starters, let’s answer the most basic question.
A tax deduction is an IRS-allowed method to reduce how much income tax you owe to the government when you file your tax return each year. Deductions are one of the most common means of reducing your taxes for typical individual or family taxpayers.
A deduction can be used to offset your income, thereby giving you a lower taxable income. As a simplified example, if you earned $50,000 in 2015, and had $5,000 in eligible deductions, your adjusted income would be $45,000 for tax purposes. If you are a single filer (not married), your federal tax rate in this circumstance is approximately 25%. Without deductions, your total tax bill is $12,500. With a $5,000 deduction, your tax bill would be $11,250, which is $1,250 lower.
Each taxpayer qualifies for a standard deduction of $6,300 in 2015 if you’re single, or $12,600 if you’re married filing jointly. If your total eligible itemized deductions are lower than that amount, you can simply use the standard deduction as your personal tax deduction. If it’s higher, you may be able to file an itemized tax return to lower your tax bill further. Please note that this is a simple example, and many other situations exist, including the potential application of Alternative Minimum Tax.
What might I be able to deduct?
When you sign up for Turo and start earning money, the IRS may treat your income as if you own a small business. At the end of the year, Turo may send you a 1099 depending on your year’s earnings. If you earned $20,000 in 2015 and had over 200 trips with Turo, you will receive a 1099K; if not, you won’t receive a 1099K from Turo. The income you earn from renting your car is taxable at the rate determined by your federal and state income tax bracket level, and you need to claim and pay taxes on your Turo income even if you don’t receive a 1099.
As an owner renting out your car on Turo, you may qualify to deduct some related business expense allowed by IRS guidelines. You will enter your business income from Turo and all of your expenses you calculate using the steps below on a form called Schedule C, which is added onto the regular 1040 you file each year.
The method we use to calculate deductions requires tracking all of your car expenses (including business mileage) and keeping all of your receipts related to the car you are renting with Turo.
It’s important to note that not all of these expenses are deductible in every circumstance; again, talk to your tax professional to see what items, if any, you’ll be able to deduct.
How to deduct line items
First, collect all of your receipts related to car expenses. You could also track your spending using a program like Mint.com, but you’ll still need to keep receipts. You can include anything in the following categories (multiplied by business use percent as described further below), and they may be tax deductible:
- Scheduled maintenance (oil changes, tire rotations, air filters)
- Repairs (engine or transmission maintenance, tires, etc.)
- Auto insurance
- Parking (as long as it’s 100% related to your Turo rental)
- Cleaning and car washes (if 100% related to your Turo rental)
- Registration and fees charged by your state, city, and/or county
- Depreciation of car value
To calculate the depreciation of your car, which is tax lingo for loss of value, you’ll need to follow IRS rules on depreciation. You’ll take the cost basis of your vehicle (the lower of how much you paid for the auto or the fair market value on the date you started using it for business) and create a depreciation schedule based on one of a few different IRS-approved methods. If you have any questions about this, it’s best to ask your accountant.
Next, calculate how many miles your car was driven during the entire calendar year from January 1 to December 31, then calculate how many miles were driven by your Turo guests. Divide the miles driven by guests by the total miles driven during the year. That percentage of miles driven by guests is going to be used in the next step. For example, if your car was driven 10,000 miles in 2015, and 5,000 were by guests, your percent driven by guests is 50%.
Now, add up the total of costs of maintenance, repairs, insurance, registration, fees, and depreciation. Multiply that by the guest miles percentage and write that number down. If your total costs were $10,000 and your renter miles percent is 50%, your total here is $5,000.
Next, add up any expense 100% related to renting your car, like cleaning and parking. Add that to the number you calculated in the last step. For example, if you paid $20 in airport parking and had two cleanings that cost $25 each 100% related to renting, your total here is $70. Remember, each dollar counts, so don’t skip the small amounts. Your total now would be $5,070, which is the amount you could hypothetically deduct on Schedule C against your Turo income.
Again, and sorry to keep beating you over the head with this, but these figures are examples only. This calculation is a great way to get a ballpark estimate of what you’ll be able to deduct, but leave the actual number crunching to your accountant, who will know the idiosyncrasies of your city, state, and personal particulars.
One other possible deduction worth mentioning is deducting the lease costs if the car you are renting out is leased. Lessees should always first check the stipulations of their lease before renting their car out. If it’s OK to rent out your car per your lease agreement, a percentage of your lease cost may be deducted in a similar manner as noted above, but the deduction is reduced for autos with a value in excess of $17,500 (leased auto inclusion). Ask your accountant about lease deductions and if they apply to your situation.
The bottom line
In our example above, the car owner could deduct $5,070 using line item deductions on Schedule C.
Taxes are difficult and nuanced, and the ubiquity and popularity of the sharing economy has provoked an ongoing discussion and evolution of what is and is not taxable or tax deductible. It’s really critical that you talk to your personal tax professional to advise you on the best course of action for you.
For the umpteenth time, another disclaimer: The information included in this post is intended to provide education on a potential financial savings to a broad segment of the general public. It does not constitute tax, investment, legal, or business advice. Neither the author nor any member of the Turo staff is a licensed tax or financial advising professional. If you have questions or are applying this to your personal situations, you must contact a licensed tax professional.