[SteveGo]

Several posts here discuss the possibility of having your Uber/Lyft activities declared a "hobby business" by the IRS. The IRS will do this if you are not profitable for 3 years running. They send you a letter, and tell you you cannot use Schedule C anymore for that activity.

Using the Standard Mileage Deduction of $0.575 per mile for business miles will render most Uber drivers showing a loss on paper. Do this 3 years in a row, and the hammer comes down. You have to file the income as "Other Income" on line 21, and you have to write off your expenses as Miscellaneous Deductions on Schedule A, Itemized deductions.

Here are the problems with that:

1. Your expenses are only deductible to the extent that they exceed 2% of your Adjusted Gross Income. So if your AGI is $25000, you lose the first $500 of those expenses.

2. Uber reports income on a 1099-K: gross payments, including tolls, SRF, and gross fares. Their commissions, and other fees are subject to that 2% above. So you are going to have to show that gross number as income on line 21. Then you have to itemize the expenses on Schedule A, slicing 2% of your AGI off the top.

3. If you do not have a lot of deductions, the Standard Deduction will often exceed any itemized deductions. In 2015 the Standard Deduction is 6300 for single, 12600 for married. Many people who own homes with mortgages, and pay property taxes can itemize. But if you rent, or your house is paid off, itemizing may not do you any good.

So if you think you might be doing this for more than 3 years, you may want to consider using the Actual Cost method for calculating vehicle expenses, unless you have enough other deductions to be able to itemize. The Actual Cost method is a PITA, but it is doable.

A small ray of sunshine is that the Hobby Income is not subject to Self Employment tax, since it is reported as Miscellaneous Income.

I am not an accountant, but I have been a Tax Preparation Volunteer for the last 6 years, under the AARP TaxAide program. We do tax preparation for free for anybody.

Hope this is informative. Check with your local area for one of us, or go find a paid preparer, if you don't want to hassle with it.

 

[StarzykCPA]

Several posts here discuss the possibility of having your Uber/Lyft activities declared a "hobby business" by the IRS. The IRS will do this if you are not profitable for 3 years running. They send you a letter, and tell you you cannot use Schedule C anymore for that activity.

This is a very common misconception that I see and hear everywhere. The IRS does not classify your activity as a hobby or a business - the nature of your activity and how you run it decides that.

If your business is profitable, then generally the assumption is the activity is a business entered into for profit. The burden is on the IRS to prove that your activity is a hobby, and not a business. This can happen even if you show a profit every year, but the opposite can also take place. What happens is, if you have 3 years of losses as you state here, then the burden of proof switches to you to prove that the activity you started is a business. Here, the assumption is that it is a hobby unless you can prove otherwise. Maybe you went 5 or 6 years showing a loss from your business before it finally turned a profit in year 7. If you're truly running the activity like a business, chances are the activity will not get reclassified to a hobby.

The nature of the activity is what ultimately decides the hobby vs. business classification. There are several factors that influence this decision. The courts have come out with a list that the IRS uses, and you can find these factors online. Things such as separate bookkeeping, consulting, time spent, profitability, etc.

Ultimately, this means that Uber/Lyft driving for one person could be classified as a hobby, but for another driver it's most definitely a business.

 

[SteveGo]

I don't believe what I posted is a misconception at all.

From the IRS website:

"The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses."

Yes there are a list of hallmarks of really trying to make a profit, but consistently zeroing out your profit with the Standard Mileage Deduction, and showing a loss each year, is a big red flag.

If the IRS jumps on any Uber driver with a demand for proof that they are trying to make a profit, what is the driver going to do? Are they going to go get a lawyer or CPA to help defend him? That is likely going to be so expensive it would be better to give in the the IRS. Are they going to go back and amend their tax returns to use the Actual Cost Method, when they failed to keep all their records? Reconstructed records are also suspect.

Here is the point I was trying to make:

If you plan to stay in this business for 3 years or more, do not use the Standard Mileage Deduction. Use the Actual Expense Deduction. The hassle of having to file as a hobby business is not worth the risk IMO

If you play games, and decide to use the Standard Mileage Deduction, and only declare enough miles to just barely show a profit, the IRS can decide you filed a fraudulent return. If you come under the scrutiny of an auditor, they have seen it all, and they are looking to get you to pay. Suspiciously convenient mileage deductions will get you into trouble.

Keep meticulous records of all your business, personal and commute mileage. Keep all of your receipts for gas, repairs and everything vehicle related.