 Hello and welcome to this session in which we'll discuss the concept of transportation expense. In the prior session, we differentiated between the deductions or expenses for self-employed individual and employee. Remember, self-employed individuals, they are basically independent contractors. They deduct those expenses on schedule C. If you're an employee and you incur some of these expenses, they are deducted on schedule A. What do we know about schedule A? Itemized deduction, the miscellaneous ones, they are suspended from year 2018 to year 2025. So in this session, we'll focus specifically on transportation expense to see how a self-employed individual will deduct those on schedule C and how would it employee deduct those on schedule A starting year 2026. Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. So what is transportation expense? The first thing you want to know, it's not travel. Travel is totally different. We're going to have a whole session about travel. Transportation expense, the definition of it is the cost of transportation, the self-employed or employee from one place to another in the course of business. Now you have to be very careful. Home to business is a commuting expense. To go from your home where you live, if you're an employee to your business place, that's commuting expense. That's not deductible. We have to be careful here. Also, transportation expenses I mentioned do not involve overnight lodging. Once you get to the overnight lodging, we're talking about travel. Travel is handled separately. However, if we have transportation expense that's deductible, whether you are self-employed or an employee, what would you include? You would include parking, tax, taxi fares like Uber, Lyft, automobile expenses, which we'll talk about those and tolls. Let's talk about commuting expense. Commuting is not deductible. Why? Because the government don't want to subsidize your commuting. Simply put, you might have a home where you live. Then from home you commute to work. Going from home to work, that's not deductible. Why? Because if it was deductible, the further you live away from the home, the more benefit you get, which is the government don't want to get involved in this. Now, commuting between jobs as an employee, it's a deductible expense. I used to live in Fort Lee, New Jersey. I would commute to the Pocono in Pennsylvania. My commute was around 80 miles to the Pocono. This was not deductible. Then some days I will go up to the Pocono, then I will drive from the Pocono to another campus for work as an employee in Bethlehem PA. I would still be in Bethlehem PA. Well, from work to work, this is commuting. This is commuting between jobs. I used to commute around 30 miles. Then I'll go back from Bethlehem back to the Fort Lee. I will take another road, and it will take me around 90 miles. Now, going back from work to home, that's not deductible. This is commuting. But from work to work, that's deductible. Remember, it's deductible on schedule A. Remember, it's an itemized deduction. Remember, you cannot use it from year 2018 to 2025. Also, temporary workstation. Another example, when I work in a CPA firm, I used to work. I would go from home. I'm going to keep Bethlehem because I used to work in Bethlehem. I would go from Eastern PA. My home was Eastern PA. Eastern PA. I would commute from Eastern PA to Bethlehem PA, going from home to work. Well, that's commuting. That's not deductible. I was an employee. Then once I get to Eastern PA, for example, I would start, I work two, three hours. Then I will visit a client in Allentown. That's going from work to work. That is deductible. Deductible expense. Why? It's between workstation. Now, if a taxpayer has a home office that qualifies as principal place of business, simply put, let's assume I am a CPA. Now, I am a CPA in my office, in my home, and I'm a CPA. I'm self-employed. I don't work for a CPA company. I don't work for a CPA firm. I'm self-employed. Now, when I go visit a client anywhere, that is deductible. That is deductible because I'm self-employed. The transportation between home and various work locations are deductible. This is not commuting. I'm going from my place of business to the client that's visiting a client. That's totally different. Let's talk about automobile expense. Deduction automobile expenses, you could either use the actual cost or automatic mileage method. So, how do you deduct? Well, you would say, I'm going to keep track of my actual cost, which is keeping track of a lot, or keeping track of my automatic mileage, which also keeping track of a lot. There's apps now for that. At actual cost. When do you use the actual cost? If you had a large expenditure that year, actual cost might be more beneficial. You will deduct the actual cost of operating an automobile. Like what? What will be the actual cost? Insurance, tolls, parking, gas, service maintenance, due to auto club, repairs, tires, and other parts. You just keep track of those. And part of that, depending on the percentage that you use it for business, your vehicle for business, it's deductible. This is the actual cost. Or you could use the automatic or the standard mileage method. You can keep track of this using an app called the TripLog or QuickBooks Self-Employed. For 2023, the mileage is 0.656 per mile. Now, bear in mind, you could be listening to this recording in 2024, 2027, I don't know what year this will be different. So, don't panic. It will change. Actually, sometime it could change within the same year. So, I'm just telling you, it's how many miles you drove, business miles times the percentage that the IRS gives you. I'm just giving you this as an example. You would add to the automatic mileage method. You would add to that direct expenses, and we're going to see what the direct expenses are. You need to know what the direct expenses. If we have direct expenses, it means we have indirect ones. Direct expenses are expenses that are incurred specifically for this client. I'll give you an example. You remember I told you I used to work in Bethlehem PA. We had many clients in New Jersey across the river. So, to go from Pennsylvania to New Jersey, I have to cross the bridge and I would have to pay a toll to go into the other state to visit that client. Well, the toll that I pay was specific to the client directly related to business. That's also deductible with the automatic mileage. Any parking I paid to visit that client specifically gets added, you know, cross the bridge. Any tolls I pay is those are direct expenses. Indirect expenses are expenses related to the total usage of the car, like insurance. You need to have insurance for the car whether you use it for personal or for business. That's a total expense. Inspect the car. You need to inspect the car and you're going to have to pay for that. Well, this is whether you use the car for business or personal. You need inspection, repairs, same thing, depreciation. Those are expenses that are not specific. They are not tied because you have that client. You have to have them because you have to have the car. Okay. Those are both expenses that are both related to the business and personal usage. Those are the indirect expenses. So, you can deduct. You could always deduct the direct expenses in addition to your automatic mileage or you can use the actual cost, which would look at an example to see how it works. Let's take a look at this example. Adam, who works as a self-employed professional, primarily use his car for business about 80% of the time. Sometimes that percentage is not given. Sometimes they tell you you drove the car 50,000 miles of which 40,000 is business. Okay. If you're not told this, you take 40 divided by 50 and that's 80%. But here I gave you it's 80%, but sometimes it's not giving. You have to know how to compute that. In 20x3, he accumulated 15,000 miles specifically for business purposes. And here are the expenses associated with the vehicle. The first thing we're going to do, we're going to start with the easy part, compute the automatic mileage. And we're going to assume for this year, it's 0.656. We're going to take the 15,000 miles, 15,000 miles times 0.656 plus all the direct expenses. Auto insurance, is that direct or indirect? That's indirect. Pen term pike, tolls for the road to visit business related. Well, we're going to have to add those, 250 parking for business purposes. That's another direct cost triple a membership, which is a membership in case something happened, they will tow your car or they'll bring you gas in case you ran out of gas. It's indirect cost car maintenance, oil change, filter change, $500. That's for the car repairs. That's for the car depreciation. That's for the whole car gasoline 3500. It's considered indirect cost. Ticket for speeding, you got a ticket, you got pulled over by the police. There is nothing you can do with this. You cannot use it for anything. So the automatic mileage will be 15,000 miles times the rate given by the IRS with the change from year to year plus the 250 direct cost plus the 120 direct cost equal to 10,210. Now we're going to compute the actual cost using the actual cost. Well, how do we compute the actual cost? Well, for one thing, we're definitely going to include the direct cost. What we're going to do for the remainder, we're going to add them up. We're going to add them up and take 80% of those add them up and take 80%. So if we take the direct cost plus all the indirect cost times the percentage use will give us 7,810, which method should add them use for the automatic mileage. For that particular year, the automatic mileage gives you 10,210. Now if Adam uses the car 90% of the time, or if you have more expenditure, then the picture might have changed and you know, the actual cost could have been, you just have to check could be could be higher. Now some of these apps, they keep track of both and they recommend to you which one which method to use. But what should you do now? What am I going to recommend to you is go to Farhat Lectures and look at additional MCQs through falls that's going to help you understand these concepts, whether you are a CPA candidate, an enrolled agent or an accounting student, invest in yourself, invest in your career. Good luck, study hard and stay safe.