Auto Insurance: Small Business Tax Deduction?

If you use your vehicle for business purposes, you can deduct the cost of auto insurance from your taxes. The specifics of how much you can deduct depend on whether the vehicle is used solely for business or for a mix of business and personal use. If you use the vehicle for both, you can only deduct the percentage of costs that count as business expenses. For example, if you use your car for business 75% of the time, 75% of your insurance costs would be deductible.

There are two ways to calculate your deduction: the standard IRS deduction, which is a standard rate per mile, or itemized deduction, where you calculate your own expenses.

Self-employed individuals can deduct car insurance

Self-employed individuals can deduct the cost of their car insurance premiums as a business expense when filing their tax returns. This is because the IRS considers the cost of car insurance to be an "ordinary and necessary" business expense. However, it's important to note that this deduction only applies if the vehicle is used for business purposes. If the vehicle is only used for personal use, then the insurance premiums cannot be deducted from taxable income.

When deducting car insurance, self-employed individuals have two methods to choose from: the Actual Expenses method and the Standard Mileage method. The former allows for the deduction of all business-related vehicle expenses, including car insurance premiums, registration fees, licenses, tolls, and parking fees. The latter, meanwhile, involves deducting a set amount for every mile driven for business purposes, which was $0.67 per mile in 2024. While the Standard Mileage method is often more advantageous, it does not allow for the separate deduction of auto insurance premiums.

It's important to note that if a vehicle is used for both personal and business purposes, the expenses must be split accordingly. This means that the deduction will be based on the percentage of mileage used for business trips. For example, if a self-employed individual uses their vehicle 70% of the time for business and 30% for personal reasons, they can only deduct 70% of their vehicle expenses, including insurance premiums.

To claim these deductions, self-employed individuals must report their expenses on Schedule C: Profit or Loss From Business. This form includes sections for listing all expenses, including car or truck expenses, vehicle depreciation, and business insurance costs. It's crucial to keep accurate records of mileage, expenses, and receipts to support any claims made during tax filing.

Armed forces reservists can deduct car insurance

Armed forces reservists who travel more than 100 miles away from their home to perform reserve service can deduct their unreimbursed travel expenses on their tax return. This includes expenses for overnight transportation, meals, and lodging. Reservists can also deduct additional employee business expenses if they itemize deductions on Schedule A.

If called to active duty, reservists may receive military differential pay from their employer, representing the difference between their regular salary and the amount being paid by the military. This pay is not subject to Social Security, Medicare, or income tax withholding, but it is still considered taxable.

Reservists may also qualify for a deferral of taxes owed if their ability to pay taxes was affected by their military service. They will need to apply for this deferral and show how their military service impacted their ability to pay.

Actual vehicle expenses vs standard mileage rate

If you use your vehicle for business purposes, you can deduct its entire cost of ownership and operation. However, if you use it for both business and personal purposes, you can only deduct the cost of its business use.

There are two methods to calculate the cost of using your vehicle for business: the standard mileage rate method and the actual expense method.

Standard Mileage Rate Method

The standard mileage rate method is a simpler way of calculating the deduction for the business use of your car. It does not require you to track individual purchases and save receipts. Instead, you keep track of your business and personal mileage for the tax year. The standard mileage rate for 2023 is 65.5 cents per mile, and for 2024, it is 67 cents per mile.

To use the standard mileage rate method, you must own or lease the car and meet the following requirements:

• You do not operate five or more cars at the same time, as in a fleet operation.
• You have not claimed a depreciation deduction for the car using any method other than straight-line.
• You have not claimed a Section 179 deduction on the car.
• You have not claimed the special depreciation allowance on the car.
• You have not claimed actual expenses after 1997 for a car you lease.

Actual Expense Method

The actual expense method requires you to add up all the money you actually spent operating your vehicle and multiply that figure by the percentage of the vehicle's business use. For example, if half of your miles are for business, you will multiply your total vehicle expenses by 50% to get the business expense.

Some of the costs you can include in your actual expenses are:

• Maintenance (such as oil changes, brake pad replacements, and tire rotations)
• Title, licensing, and registration fees
• Vehicle depreciation
• Insurance
• Tolls and parking fees

Both methods have their advantages and disadvantages, and they often produce vastly different results. You should calculate your expenses using both methods and then choose the one that gives you the largest deduction and the greatest tax benefit.

The standard mileage rate method is often better if you do a lot of driving, while the actual expense method is preferable if you have a more expensive vehicle or a large car-related expense, such as a major repair.

Additionally, if you choose to use the standard mileage rate method in the first year you use your car for business, you can switch between the two methods in subsequent years. However, if you use the actual expense method in the first year, you must continue using this method for that specific vehicle in future years.

Commercial auto insurance

The cost of commercial auto insurance depends on various factors, including the type of business, the vehicle being insured, the driving records of employees, and the location of the company. The national median monthly cost for commercial auto insurance in 2022 ranged from $172 for contractors to $175 for business auto customers, with an average monthly cost of about $220.

Business-use policy

If you use your vehicle for business purposes, you can deduct the cost of your car insurance from your taxes. This includes people who are self-employed, armed forces reservists travelling over 100 miles from home, and qualified performing artists.

The cost of your car insurance is just one of the many items that can be included in your expenses. Other deductible expenses include:

• Deductible car repairs
• Lease payments (subject to the lease inclusion amount)
• Registration fees and licenses
• Tolls and parking fees

There are two methods for deducting vehicle expenses: the standard mileage rate and the actual vehicle expenses.

The standard mileage rate is $0.655 per mile in 2023. This method does not allow you to deduct auto insurance premiums separately, but you can still deduct tolls and parking fees.

The actual vehicle expenses method includes car insurance and other items listed above.

If you use your car for both personal and business purposes, you will need to divide the expenses between personal and business use based on the miles driven. For example, if 70% of the miles you drive are for business, you can apply 70% of your expenses to your deduction.

If you are self-employed, you will need to add this information to Schedule C. For other scenarios, you will use Form 2106.

Frequently asked questions