Yes, this is yet another article in the series called Seven Tips for Singer Taxes series. Thus far we've covered some basics and the first four tips:
Tip #1: Keep a log of all your income.
Tip #2: Put all your self-employment income into a separate checking account.
Tip #3: Only use your business checking account for business.
Tip #4: Save for and pay estimated taxes.That leads up to the next tip!
Tip #5: Track your mileage.
This and the following tip are the heavy-hitters when it comes to business expenses. Mileage, in particular, frequently tops the list as my single biggest expense.
Like the previous four tips, this one has more to do with your everyday life as a singer than doing your taxes at tax time. It's about developing good bookkeeping habits throughout the year.
The mechanics are pretty easy. Whenever you drive to a gig, jot down the date, how many miles you drove, and the location that you drove to. Nowadays, there's a ton of apps to track mileage, but I still prefer a tiny little notepad and a pen in my car.
Before I leave home, I reset my trip odometer, I drive to and from the gig, and as soon as I park my car at home, I pull out the notebook and write the mileage down. That's the routine.
Keeping a routine is the critical part. It means that you can keep the habit going. And the easier that you make that routine, the more likely you are to continue doing it.
For me, a notebook is faster and easier day-to-day than a smartphone app, and streamlining it helps me keep the habit going. Having it on paper instead of in an app also means that if I change phones, or I lose my password, or the maker of the app goes out of business, I don't lose my data.
To calculate the business expense at tax time, you simply multiply your total mileage by that year's rate (usually around 50¢ per mile). The business expense lowers your gross profits, and thus you pay less taxes.
(See this chart at https://www.irs.gov/tax-professionals/standard-mileage-rates/ )
Protip: Knowing the rate also helps guide me when it come to accepting a gig. If you take the total miles you're going to drive for the gig and divide by two, that instantly give you an idea of know how much of that money that gig is going to cost you in expenses.
Indulge me in a bit of math. A $50 gig that is 50 miles away means 100 miles of driving. Divide that by two (at 50¢ per mile) and suddenly, there's no profit. And that's before we account for travel time, preparation time, and rehearsal and performance time, plus the monetary expenses of buying a score and - oh yeah - 15-20% off the top for taxes. So don't take that gig! (Unless you're just feeling charitable, which, in the right situation, can be a great reason.)
A few things about this business expense, though. First, the intention of this rate is that it includes the overall cost of running a vehicle for your business. The mistake here is thinking that it only covers gas. The rate also covers wear and tear on the vehicle, things like oil changes, tires, brakes, batteries, the cost of insurance, and even the depreciation of the vehicle's value. So when doing your estimates, it's better to use that 50¢ per mile figure instead of trying to figure out how many gallons of gas it will require.
If you really want to, you do have the option to track your actual vehicle expenses instead of mileage. To do that, you total up all of your vehicle's expenses, and then apply a percentage of that total based on how much you use your car for business. That almost never works out in your favor, though, and if you ever do it that way, from that point on, you can't use the mileage rate on that vehicle.
As for that business checking account? Sorry, unless you're using your car 100% of the time for business and you decide you're going to track expenses instead of mileage, don't be using that debit card at the pump. Through the year, you have to think of keeping the car running as a personal expense, and something you have to include in your personal budget. You'll get to deduct the expense at tax time, but not before.
This one is also important: You can only write down mileage that is for your independent contractor business, your self-employment. You can't do this for any work as an employEE, even if it is singing work like a church job, for the opera chorus, or for a "day job."
(To be fair, I have heard that there's a 2% Employee Expense thing that you track mileage for, available to employees. I think the gist of it is that you can claim up to two percent of your employee wages as an expense of being an employee, piled together with other expenses. It'd have to be tracked apart from the other mileage, though, and I'm just not convinced it's worth my while. It you go this route, make sure you're doing it with a professional.)
Finally, you do actually have to write it down. You can't just guess some large, round number. You specifically are asked if you have a detailed journal of the mileage. The IRS is fully aware that this business expense can be exploited, so don't lie or fudge the numbers on this one.
For the next tip, I'll cover another major business expense.