At year-end, we normally send an e-mail such as this explaining what the tax law changes will be for the following year. Unfortunately, since there is still uncertainty about the status of the election and control of the Senate, we will not know the likelihood of potential tax law changes until the Georgia U.S. Senate runoff on January 5th, 2021. That will determine control of the Senate which, in turn, will determine the likelihood of president-elect Biden’s administration being able to implement his wish-list of tax changes.
Disclaimer: this is not a political e-mail. It is simply an overview of potential tax changes.
We had hoped that we would have a clearer picture of which changes would go into effect for 2021 and beyond in order to provide tax planning for year-end 2020; however, given that the run-off will not be until January 5th, it is still unclear whether these tax policy changes will go into effect and, if so, whether they will be made retroactive to January 1, 2021 or will be effective for tax year 2022.
Personal Tax Changes (potentially…)
Generally, president-elect Biden’s tax policy changes are aimed toward households that have more than $400,000 in taxable income. Since this is per household, this means a Single person earning $400K or above, a Married couple each earning $200K, or a Married couple with one earner but still exceeding the $400K threshold.
Business Tax Changes (potentially…)
On the business side, the major changes are increasing corporate tax rates, implementing minimum tax for companies with large book revenue, and expanding credits for renewable energy and manufacturing.
While in a perfect world, we would know exactly what the tax policy changes will be and when they will be implemented, 2020 is again leaving us with uncertainty.
Prior to the January 5th Georgia runoff, we will not have certainty as to who will control the Senate, which means we cannot accurately predict the likelihood of the above tax policy changes. Unfortunately, this makes year-end 2020 tax planning difficult without knowing which tax laws will be in effect for 2021; however, if you would like to schedule a time to discuss year-end planning with us, please contact me at 512-695-1231.
Wishing You and Yours a Happy Thanksgiving and Holiday Season.
As we close in on year-end, below is some information regarding the new stimulus bill that Congress passed late last night, as well as a reminder about new Form 1099-NEC/MISC reporting:
We are happy to help if you have any questions about any of the above.
Best Wishes to You and Yours over the Holiday season!
NEW SALES TAX NEXUS RULES
The Supreme Court recently ruled in the matter of South Dakota v. Wayfair in a case that has a huge impact for businesses that sell products online, both tangible products and intangible items such as software, SAAS, services, etc.
Prior to this ruling, a business in Texas could sell products online to a customer in Oklahoma and would not be required to collect and remit sales tax to Oklahoma if the Texas-based business never physically entered into Oklahoma to sell their product. This rule has changed. Now, a Texas-based business selling to a customer in another state must collect and remit sales taxes to that state even if the business did not physically enter that state. However, there are some exceptions.
States realize that this could put a huge burden on smaller businesses which may only have a few sales into a state other than the one in which they are physically present. Therefore, states have generally said that if you have less than $100,000 of sales into their state within the year or have less than 200 separate transactions into their state within the year, there is no requirement to collect and remit sales tax.
Note that each state has different thresholds. For example, Oklahoma has a threshold of $10,000 whereas Tennessee has a threshold of $500,000 which Massachusetts has a threshold of $500,000 in sales AND 100 or more transactions.
A good write-up can be found here: https://blog.taxjar.com/economic-nexus-laws/ which also includes a break-down of each state’s threshold levels in addition to the dates these new threshold rules became or will become effective. There are also some good calculators available and links to each state’s specific rule and revenue departments if you are required to register your business within those states.
What this means for 2018 tax preparation?
For 2018 tax preparation, if you are a business in Texas, for example, which has historically only operated within Texas and sourced all revenues as Texas-based, but had revenues from other states, the revenue earned for 2018 will need to be broken out by state. Additionally, you may also need to track transactions by state to see if you exceed any of the state thresholds.
To prepare for year-end and 2018 tax filings, we strongly encourage you to have someone within your organization review the above rules and review your revenue and transaction numbers by state to determine if you have a requirement to collect sales taxes and register within those states.
How could this impact state income tax filings?
A business’s requirement to file an income tax return for any given state has historically been protected under P.L. 86-272 which states generally that if a business merely has solicitation of sales within a state but is not physically present within that state, that state cannot require that business to file an income tax return. However, some states have looked to an economic nexus standard which says that if a business receives over a certain amount of revenue from a state, or if that revenue represents a certain percentage of total company sales, the state will require the company to file an income tax return within their state. These thresholds are generally higher than the thresholds mentioned above for sales tax nexus. For example, California required sales in excess of $561,951 or 25% of total corporate sales under their economic nexus standard for 2017.
However, as states begin to collect sales taxes from businesses based on the lower sales tax thresholds above, their departments of revenue will have company information on file and therefore it may become more likely that those states will also challenge the business’s requirement to submit income tax returns in their state as well.
2018 Tax Return filings
We have been keeping an eye on these new rulings, the thresholds for each state, and the new rulings being announced by each state. While preparing your 2018 business tax return, we may have additional questions regarding state sales to determine if your business is in compliance with these new sales tax and income tax nexus rules. The likelihood is the questions we will be asking is did you exceed any of the sales tax thresholds in any state you sell into, whether that is the sale of tangible goods or intangible services.
Since these new sales tax rules have just recently been made effective by most states or will become effective as of January 1, 2019, we strongly suggest reviewing the link above to determine what the reporting thresholds are for any states that your business sells into.
If you have questions regarding these new rules/standards or whether or not your business may have a requirement to register within a state to collect and remit sales taxes, or if you have questions about the potential for additional state income tax return filings, please contact us.
SUMMARY: FINAL TAX REFORM BILL
We don’t mean to take any of the fun away from you, but we went ahead and read the entire Tax Reform Bill and summarized it below. Apologies if you were intending to read it yourself – hope we don’t spoil the ending!
Here are the main points:
NEW TAX BRACKETS
MARRIED FILING JOINT
If taxable income is:
The tax is:
Not over $19,050
10% of taxable income
Over $19,050 but not over $77,400
$1,905, plus 12% of the excess over $19,050
Over $77,400 but not over $165,000
$8,907, plus 22% of the excess over $77,400
Over $165,000 but not over $315,000
$28,179, plus 24% of the excess over $165,000
Over $315,000 but not over $400,000
$64,179, plus 32% of the excess over $315,000
Over $400,000 but not over $600,000
$91,379, plus 35% of the excess over $400,000
$161,379, plus 37% of the excess over $600,000
If taxable income is:
The tax is:
Not over $9,525
10% of taxable income
Over $9,525 but not over $38,700
$952.50, plus 12% of the excess over $9,525
Over $38,700 but not over $82,500
$4,453.50, plus 22% of the excess over $38,700
Over $82,500 but not over $157,500
$14,089.50, plus 24% of the excess over $82,500
Over $157,500 but not over $200,000
$32,089.50, plus 32% of the excess over $157,500
Over $200,000 but not over $500,000
$45,689.50, plus 35% of the excess over $200,000
$150,689.50, plus 37% of the excess over $500,000
The timing of the Tax Reform Bill is unfortunate as it passed a week before the end of the year, which does not provide a lot of time for planning before 2018 begins; however, if you have any questions or would like to schedule an appointment or call to discuss, please feel free to contact us. As time permits during our “Busy Season,” we will try our best to work in 2018 tax planning along with the preparation of your 2017 tax returns.
Best Wishes for a Happy, Healthy and Prosperous 2018!
Iain Howe & David Romero
(your friendly neighborhood CPAs!)
BUSINESS PERSONAL PROPERTY RENDITIONS
As a reminder, your Texas Business Personal Property(BPP) Rendition is due April 15th and is based on business personal property on-hand as of January 1, 2018.
If you have any obsolete property or equipment, it is best to sell, dispose of, or donate the asset prior to year-end so that it will not be on your January 1st property list. Doing so will reduce the value of assets that your BPP tax is assessed on.
This also applies to inventory, and is the same reason a lot of car dealers will provide year-end incentives to sell cars so that they are not sitting on their car lots and taxable on January 1st.
TAX REFORM - THE GOOD, THE BAD AND THE UGLY
On November 2nd, the House Ways and Means Committee released its draft of tax reform measures. While the draft must still go through a mark-up process, and then must be approved by the House and Senate, the latter of which is expected to have their own version, this draft provides a good indication of the basic framework.
In order to pass the bill through budget reconciliation (a process allowing passage with just a simple majority), the bill cannot add more than $1.5 trillion to the deficit. The bill is therefore drafted to ensure there are revenue raising measures through disallowance of deductions and credits to offset a majority of the “good” tax reform changes, such as lower corporate tax rates, increased child care credits, etc.
Below is a list of the good, the bad and the ugly based on the current November 2nd draft:
Corporate tax rates would be reduced from 35% to 20% effective as of January 1, 2018
Equipment that businesses purchase after September 27, 2017 would qualify for 100% expensing through December 31, 2022. Note that this will allow for 2017 year-end planning as the 100% expensing is effective as of 9/27/2017.
Alternative Minimum Tax (AMT) would be repealed at both the business and individual levels (50% of any remaining carryover credits could be used in 2019, 2020 and 2021, and any remaining credit can be fully utilized in 2022)
The 30% residential energy credit is extended through tax year 2021, although it is reduced to 26% in 2020 and 22% in 2021.
U.S. corporations owning foreign corporations can now receive a 100% dividends-received-deduction (previously 70%) for dividends paid by the foreign corporation.
Repatriation of foreign earnings currently offshore can be brought back into the U.S. at a 12% tax rate (or 5% for property other than cash), offset by foreign taxes paid and/or foreign credit carryovers. Can be paid over 8 years, if elected.
A 25% rate may be available to certain individuals who are partners or shareholders in partnerships or S Corps (flow-through entities). Generally, this is applicable to passive activities, i.e. activities in which the partner or shareholder does not actively participate; however, partners or shareholders who actively participate will by default have 30% of earnings subject to the lower 25% rate, with the election for a higher amount to be subject to 25% if the capital investments in their business are higher than 30%. Certain service businesses (involving health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services) may not be eligible unless their businesses involve a lot of capital assets, e.g. MRI machines, buildings, and other capital assets.
A more-than-50% sale or exchange of a partnership interest normally results in a technical termination of the partnership. This technical termination would be repealed, so a partnership would continue under its current form vs. “terminating” and reforming.
Code Section 179 deductions would increase from the current $500,000 to $5 million. The threshold for phase-out would also increase from $2 million to $20 million. Therefore, a business that puts less than $20 million in fixed assets in service during the year can fully expense up to $5 million worth of assets under Section 179. Qualifying assets would include energy-efficient heating and air-conditioning property.
Currently, C corporations with more than $5 million of average gross receipts (and partnerships with C Corp partners) cannot use the cash method of accounting. This level would be increased to $25 million, which should allow more companies to use the less-complex cash method. This would also allow those companies to account for inventories as nonincidental material and supplies, as well as exempting those companies from the Section 263A UNICAP rules.
The current 20% capital gains rate and qualified dividends rate will stay in place.
Tax brackets drop from 7 to 4 (12%, 25%, 35%, and 39.6%). While the 39.6% rate stays, it will be effective for income over $1 million vs. the current $480,050.
The higher 35% tax bracket will apply to taxable income over $200,000 for Single filers, but at $260,000 for Married Filing Joint filers.
The standard deduction will be almost doubled, but personal exemptions will be repealed.
The limit for charitable contributions is increased to 60% of adjusted gross income vs. 50% under current law.
The Pease limitation would be repealed (this phased out the amount of itemized deductions allowed as income increased above $313,800 for MFJ or $261,500 for Single).
The child tax credit is increased from $1,000 to $1,600 with a $300 credit available to dependents who are not qualified children. Both are subject to phase-out based on income.
The transfer of wealth exemption and generation-skipping transfer tax exemption are both increased from $5.6 million to $10 million for transfers after 2017.
Estate tax would be repealed for decedents dying after 2023, as would the generation-skipping transfer tax.
Gift transfers would also receive the increased $10 million exemption, and the rate on gifts above this amount would drop from 40% to 35%.
Property received from a decedent would continue to receive a step-up in basis to fair market value at date of death.
There is no limitation on the amount an individual is able to contribute to retirement accounts, as had been previously rumored.
In-service distributions from defined benefit plans can begin at age 59 ½ vs. the current 62.
Corporations will only be able to deduct interest expense to the extent they have interest income; however, this would only be applicable to businesses with revenues in excess of $25 million, and whose interest expense exceeds 50% of its adjusted taxable income.
Net Operating Losses (NOLs) can no longer be carried back. While the carryforward period for NOLs would be indefinite, a company can only use NOLs to offset up to 90% of taxable income. NOLs would be increased by an interest factor.
Like-kind exchanges (§1031) can only be used for real property (real-estate and land) going forward. It will no longer apply to other assets, e.g. selling a vehicle and purchasing another vehicle while deferring any gain on the sale of the first vehicle.
Employer-provided child care credit will be repealed.
Certain unused business credits cannot be carried back or forward.
The Americans with Disabilities Act (ADA) credit will be repealed (allowed businesses to receive a credit for the cost of providing access to disabled individuals).
The tip credit available to employers is now based on the higher current minimum wage which may limit the number of businesses that qualify for the credit if they pay less than minimum wage to their tipped employees.
The 3.8% net investment income tax and 0.9% hospital insurance tax is expected to stay in place.
Married individual taxpayers with more than $1.2 million of taxable income ($1 million if Single) will begin to lose the benefit of the 12% tax bracket at a rate of $6 for every $100 above the threshold. Essentially, the 12% bracket is recalculated at 39.6% as income begins to exceed the thresholds above.
Personal exemptions ($4,050 per individual/dependent) will be repealed, but the standard deduction will almost double.
Limitation on mortgage interest will be at $500,000 vs. the current $1 million; and the additional $100,000 of home equity will be repealed. This will only apply to new loans taken out after Nov. 2, 2017. Refinancing would not be considered a new loan.
Medical and dental expenses, state and local taxes, casualty losses, tax preparation fees, moving expenses, and unreimbursed employee expenses would no longer qualify as itemized deductions. The property tax deduction would be limited to $10,000.
The exclusion of gain on the sale of a principle residence will begin to phase-out by $1 for every dollar the taxpayer’s adjusted gross income (AGI) exceeds $500,000 ($250,000 for Single). The requirement is increased to 5 of the 8 years prior to sale vs. the current 2 of the last 5, and the exclusion is only allowed once every 5 years (meant to take away the benefit for “flippers.”)
Adoption credit is repealed.
Increased standard deduction for the elderly is repealed.
Deferred compensation would be taxable as soon as it is no longer subject to a requirement to provide future service. Stock options would also be subject to tax once no longer subject to vesting conditions.
Highly-compensated individuals who are employees of publicly-traded companies can no longer exclude the value of commissions or performance-based compensation, including stock options, when calculating compensation for purposes of Section 162(m). This section generally limits the deduction for companies to $1 million per year for certain highly-paid employees. A 20% excise tax would be assessed for any compensation over $1 million for employees of tax-exempt organizations.
Roth IRA recharacterizations would be eliminated, as well as the ability for taxpayers to recharacterize a traditional IRA to a Roth IRA. This means no more “backdoor” Roth IRA contributions.
The exclusion for housing provided by an employer would be limited to $50,000 ($25,000 for a married individual filing a joint return), phased out for individuals considered highly compensated ($120K for 2017).
Employee achievement awards would now be taxable to the employee.
Moving expense reimbursements paid by an employer would not be deductible by the employer.
Contributions made to corporations normally qualify for non-recognition under various Code sections; however, going forward, contributions of money and property could be included in the gross income of the company. This would apply to partnerships as well as corporations. It is generally meant to avoid the ability for governmental entities to fund a company and have the company treat that funding as a capital contribution vs. income, but could have farther reaching implications.
The domestic production activities deduction will be repealed. This generally provided a deduction to businesses which paid wages and which manufactured or produced/developed their goods within the U.S.
The deduction for entertainment expenses would be repealed. Normally, meals and entertainment expenses are deductible at 50%, so if you entertained a business client by taking him or her to a meal then to a baseball game, only the meal will be a deductible item going forward. No deduction would be allowed for entertainment, amusement or recreation activities, facilities, or membership dues, including on-site gyms.
Income from the sale of patents, inventions, models or designs, or secret formulas and processes would no longer qualify as capital assets. Gain from the sale of these assets would therefore be taxable under the higher ordinary tax rates.
The credit for new plug-in electric vehicles would be repealed.
Payments made by a U.S. corporation to a related foreign corporation that are deductible, includible in cost of goods sold, or includible in the basis of depreciable or amortizable assets are subject to a 20% excise tax, unless the foreign corporation elects to treat the payments as income effectively connected with the conduct of a U.S. trade or business. An exception applies for intercompany services that the U.S. company elects to pay for at cost (i.e. no markup).
Planning considerations should include paying property taxes before year-end 2017 (if not in AMT) instead of waiting until January, purchasing large items before year-end 2017 to take advantage of the 100% expensing, generally deferring income to 2018 and pulling expenses into 2017 if tax rates are to drop in 2018, and moving before year-end if you would otherwise qualify to deduct moving expenses.
CAUTION: Each taxpayer’s situation is different, and the items above are a general outline of a bill that must still be marked up and approved by both the House and Senate (with the Senate expected to draft its own version). That said, the items above are meant as a general guideline of what the current administration is looking at when considering tax reform.
The President has asked for a final bill to be on his desk by Christmas Day, which ultimately does not provide a lot of time for 2017 year-end planning. The purpose of this outline is to provide you with information to consider now as the process of tax reform runs through its various stages.
If you have questions about how this may impact your particular tax situation, or if you would like us to analyze how these various changes could impact you, please contact us and we will be happy to do so.
ELECTION - TAX IMPACT
Well, after a harrowing evening, it appears the outcome is a Trump presidency. What does that potentially mean for taxes?
Based upon Trump’s tax policy (which could change, of course; however, with Republicans retaining control over the House and Senate, passage of any changes may be easier), here are some things to consider:
While nothing is likely to change for the 2016 tax filing year, there will be plenty of planning opportunities ahead as the likelihood of the above tax policies passing into law becomes more discernible.
We will be keeping an ever-present eye on these changes, but if you have an interest in attending an event to receive a rundown of these policies and what to expect, please let us know. A number of financial advisory firms will host webinars and meetings to discuss these potential changes and what it could mean for your bottom line.
As these tax policy changes become more certain, we will do our best to keep you apprised.
On Nov. 24th, IRS in Notice 2015-82 increased the threshold for deducting business expenses from $200 (or $500 if you made the de minimis election) to $2,500!
This is great news for small businesses! Now, instead of capitalizing and depreciating purchases in excess of $200 or $500, they can immediately be expensed.
While IRS indicated the rule change is effective for 2016 tax returns, they also indicated they would not challenge taxpayers who used the new limit for 2015.
Contact me if you would like more information about this change and what it means to your business.
With all the hype about Uber coming to town, I was curious to see what it was all about. Reading the articles and Facebook posts online, it sounded like a pretty good proposition – drive your car whenever you want for as much or as little time as you want, and get paid weekly! What a great way to make extra cash on the weekends, in between college classes, or to save up for that new item you have wanted to buy. But, although the cash coming into your bank account is great to see, what are the real costs? And once these other costs are factored into the equation, is it still worth it to drive for Uber? Let’s take a closer look…
What is Uber?
Uber is an application designed to allow smart phone users to jump online using the Uber app and hail a ride from an Uber driver in their area. The app shows the location of the nearest Uber driver to the requesting rider and then sends out a “ping” to the driver giving him or her 15 seconds to accept the fare. If the driver does not accept the fare, it pings the next closest driver. Once a driver accepts the fare, he or she drives to the user’s location. The requesting rider is able to see the Uber driver on the map and follow the driver’s progress as the driver heads to the rider’s location. The Uber driver then drives the rider to the desired location; however, unlike taxi cabs, the entire transaction is completely cashless! The charge for the ride (including tip, which the rider can preset) is charged to the rider’s credit card which the rider sets up beforehand. No tip is required so no cash ever changes hands.
Who is my Uber driver?
Before someone can partner with Uber to be a driver (offering rideshare), Uber requests a significant amount of information. They, of course, want to see your driver’s license, proof of insurance, and registration, but they also run background checks going back seven years including a federal, state and county background check, driving record check, social security trace, and sex offender registry screening. You must also have a reliable car that is above a certain model year. I understand that the actual model year requirement can change by city.
A rating system?
One of the neat things about the Uber experience is you get to rate your driver. After completing the ride, you can rate your driver from 1 to 5 stars based on the service you received. Similarly, drivers can rate their passengers using the same rating system. If a passenger has a bad experience and rates their driver low (below a 3, I believe), the passenger will never have that Uber driver pick them up again. Even if the driver is the closest to them, the Uber app will ping the next available driver. If Uber drivers’ ratings fall below a certain level, they become in jeopardy of losing their right to be an Uber driver. This provides drivers with an incentive to make sure you have a pleasant experience.
Costs of being an Uber driver.
As mentioned above, while the cash going into your bank account once a week is nice to see, there are a number of costs associated with driving for Uber that should be taken into consideration to determine if this is a worthwhile venture. An obvious cost is the price of gas – as you drive around the town from location to location, you can easily go through a full tank a day or more. In addition, this adds a number of miles to your car’s odometer which can quickly begin to reduce the resale value of your car. And then, of course, there are taxes which are due on the income you receive. Let’s take them one-by-one:
Depending on the cost of gas in your area, and the type of gas your car uses (regular versus supreme), this could be one of your largest expenses. Smart drivers will begin to learn where the best places are to go for gas fill-ups by perhaps using apps such as Gas Buddy. There are also ways of keeping gas costs to a minimum, e.g. making sure your tires are correctly inflated, getting rid of excess weight in your car, etc. I had heard someone mention the best time to fill up is first thing in the morning when the outside air is coolest since the gas (liquid) is more compact the colder it is. As the daytime temperatures begin to heat up, the gas liquid begins to expand, the theory being you receive less gas if you fill up when it is hot outside. I have no idea if there is any truth to this, but it seems to make a little bit of sense!
As any car dealer will tell you, a car with fewer miles on it will typically net you a higher resale value than one with many miles on the odometer. An 8-hour shift driving around town can easily put 200 to 300 miles on your car, perhaps more. Along with the increased mileage comes the need for additional maintenance and repairs – perhaps you will be stopping for oil changes more often, or may begin to notice performance issues as you deal with city stop-start driving all day. Thankfully the IRS allows for a standard mileage deduction to compensate for the cost of these additional expenses. It is therefore imperative that you keep track of your business miles traveled so you can support your mileage deduction at year-end. The deduction for 2014 is 56 cents for every mile traveled for business purposes; however, the IRS will want to see proof, so estimating your mileage in most cases will not cut it. Without proof, the IRS can deny the entire deduction!
At year-end, assuming Uber has paid you $600 or more, you will receive a Form 1099-MISC. This form will report the gross revenues that Uber has paid you, which will typically be reported on Schedule C of your personal tax return. From this number you can then begin deducting your expenses. Interestingly, some people believe if you make less than $600 then you do not need to report it – this is not true. If you make less than $600 this just means the person paying you does not need to issue you a Form 1099-MISC; however, you must still report the revenue you earned. From the total gross revenue number you can deduct your mileage and any other “ordinary and necessary” business expenses required to earn the revenue. Note that the standard mileage deduction includes a component for gas, maintenance, tires, depreciation, and other costs so if you use the standard mileage rate, you cannot also separately deduct gas and other expenses as this would be double-dipping. As Uber requires your car to be clean and well maintained, if you typically drive your car around town with 3 inches of dirt on it and only incur the cost of car washes because it is required for your job, then your car washes can be deducted as an ordinary and necessary business expense. A tip is to look for carwash places that offer unlimited carwashes for a set price per month. If you purchase a Garmin to get around town while operating your business then this is deductible too. Tolls you pay can be deducted; however, Uber advises you to invoice the rider as part of the fare. Don’t make the mistake of NOT deducting your tolls when you file your tax return however. If the charge for tolls is included in your fare, and your fare is included in the gross revenue reported on your Form 1099-MISC, you will want to include your toll expense on your tax return to offset that portion of the fare included in gross revenue.
Federal taxes will be assessed on the income you earn. This could eat up a quarter of your gross revenues right off the bat depending on which tax bracket you are in. On top of that, since the income is considered self-employment income, there are also payroll taxes due. Since being self-employed you are both the employee and the employer, you are responsible for paying in the full 15.3% (7.65% for the employer’s portion and 7.65% for the employee’s portion). Since the employer’s portion is a business expense, you receive a bit of a break for paying this expense when figuring your income tax.
A big doozie is insurance. I would hazard to guess that a majority of Uber drivers do not have an insurance policy that covers them for using their car for business. Thankfully, according to Uber’s website, Uber has a supplemental $1,000,000 insurance policy which should cover any damage by an Uber driver to another person’s property if the driver’s own insurance will not cover it; however, if the driver’s insurance company learns the driver has been using their car to operate a business, and the driver’s insurance policy prohibits this type of use of their vehicle, the driver’s insurance policy may not cover damage done to their own vehicle. If you plan to drive for Uber, it may be wise to check with your insurance agent to be sure you have adequate coverage and also check with Uber to determine what type of insurance coverage they provide you as a driver.
Uber’s 20% cut!
You didn’t think Uber was going to provide their technology for free, did you? Off each fare, Uber takes a 20% cut as their commission for providing you with access to their technology. This can take a big bite out of your earnings.
So, is it worth it?
To test out the actual earnings and costs involved, I signed up to be an Uber driver (UberX) and did some driving around Austin, Texas. On the weekend of the X-Games, I drove 97 miles on Saturday and earned passenger fares of $128.88. From this amount, I paid 20% to Uber ($25.77) and spent approximately 17 cents per mile on gas ($16.49). The IRS rate of 56 cents per mile factors in gas, maintenance, repairs, and depreciation, so let’s use that instead for simplicity (97 x 56 cents = $54.32). At the end of the day, my $128.88 fare is reduced by $25.77 in commissions and $54.32 in gas/depreciation/maintenance costs = $48.79 of gross profit. This amount is subject to both federal and self-employment tax at approximately 40% combined leaving me with 60% of $48.79 at the end of the day, or $29.27. The scary part is the amount deposited into my bank account is $103.11 ($128.88 less $25.77 commissions) which seems okay for a day’s work. It is not until tax time that you may realize the $103.11 is really only $29.27 after factoring in taxes and other costs.
Be sure you are putting some of your earnings aside to cover taxes – say 30-40%. If you do not, you will have a BIG surprise when you file your tax return at year-end!
While the Uber experience is still new to Austin, Uber has some great incentives for ensuring drivers make at least a minimum amount per hour as a way to spur interest in driving for Uber. For example, current promotions will guarantee that if you only take a couple of rides in an hour and only have say $20 in fares, Uber will chip in another $20 if the guarantee is $40/hour for that day and time. Not bad! A drive around down this past weekend (375 miles of driving both Saturday and Sunday) netted $406.12 in fares but another $195.86 in Uber’s guarantee match for a total of $601.98. The total time driving was around 14 hours, 7 hours each day, so before taxes (after subtracting commissions of $102.02 and the 56 cents per mile gas/maintenance/depreciation cost of $210 and $10 for a car wash), this nets to around $20 per hour. However, this is with the hourly guarantee match which may not always be available. Had it not been for the additional $195.86, the hourly rate would have been closer to a dismal $6 per hour. Factoring in estimated federal and self-employment taxes, take-home pay was around $172.49 for 14 hours worth of driving, including the hourly guarantee amount, so around $12 per hour net. Without the guarantee, the net take-home for 14 hours worth of driving after all taxes and expenses are factored in would have been around $52.
So, is it worth it? You decide.
Iain Howe is a CPA practicing in public accounting with the Austin-based CPA firm Iain Howe, CPA & Associates, PLLC. He can be reached at (512) 695-1231.
Disclaimer required by the IRS Rules of Practice: Any statements regarding federal taxes contained in this communication were not written or intended to be used, and cannot be used, by any person or entity as a basis for avoiding federal tax penalties.