Auto Insurance And Mileage: What's Deductible?

If you use your car for personal use, you likely cannot deduct your car insurance costs on your tax return. However, if you use your car for business-related purposes, you may be able to deduct part of your insurance premium and mileage. This includes those who are self-employed and use their car for business purposes, as well as employees whose employers are not planning to reimburse them for business-related car expenses. In addition to insurance premiums, you may also be able to deduct other auto-related costs, including gas, repairs, parking, and value depreciation, as long as these costs are directly related to business use.

Self-employed people can deduct car insurance

Self-employed people can choose between two methods to calculate their car expenses: the Actual Expenses method and the Standard Mileage method. The Actual Expenses method allows for the deduction of car insurance premiums, as well as other costs such as repairs, lease payments, registration fees, and licenses. The Standard Mileage method, on the other hand, does not allow for the deduction of car insurance premiums but provides a standard rate per mile for business-related travel. For example, the standard mileage rate for 2019 was 58 cents per mile.

It is important to note that self-employed individuals who use their car for both business and personal purposes must split the expenses accordingly. This means that if a self-employed person uses their car for business 30% of the time and for personal use 70% of the time, they can only deduct 30% of their car insurance premiums.

To deduct car insurance premiums, self-employed individuals will need to fill out the Schedule C form, which can be found on the IRS website. This form is used to report business expenses, including car-related expenses. It is always recommended to consult a tax professional to ensure that you are filing correctly and taking advantage of all applicable deductions.

Employees can't deduct car insurance

If you are an employee, you cannot deduct the cost of your car insurance from your taxable income. This is true even if your employer does not reimburse you for using your car for work. This rule has been in place since December 2017, when the Tax Cuts and Jobs Act suspended miscellaneous itemized deductions subject to the 2% floor.

However, there are some exceptions. Certain taxpayers may still deduct unreimbursed employee travel expenses, including Armed Forces reservists, qualified performing artists, and fee-basis state or local government officials.

If you are self-employed, you can deduct car insurance costs as a business expense. This is also true if you are a business owner.

If you are using your car for charitable purposes, you are often eligible to deduct either your actual expenses, such as gas and oil, or your mileage at a rate of 14 cents per mile. However, you cannot deduct general costs such as insurance, general maintenance, registration fees, or new tires.

Mileage calculation for business trips

Types of Trips Considered as Business Miles:

• Driving to meet clients or customers.
• Driving to meet with your accountant or small business lawyer.
• Driving to the bank for a business transaction.
• Driving to the store to pick up office supplies.
• Any other business-related errands.

Exclusions:

• Your regular commute to your business building, such as driving from your home to your office.
• Extra errands while on a business-related trip, such as grabbing coffee when you're already out running business errands.

Calculation Methods:

There are generally two methods for calculating mileage deductions: the standard mileage rate method and the actual expense method.

Standard Mileage Rate Method:

This method is simpler and involves claiming a standard amount per mile driven. The standard mileage rate is set by the relevant revenue agency, such as the Internal Revenue Service (IRS) in the United States. The rate may vary annually and is intended to cover the total cost of maintaining a vehicle, including fuel, tax, insurance, and depreciation.

To calculate your deduction using this method, you need to:

• Determine if you can use the standard mileage rate. This method typically applies if you own or lease the car. Certain conditions may disqualify you from using this method, such as operating five or more cars simultaneously or claiming certain deductions.
• Know the mileage deduction rate for the relevant tax year.
• Multiply your business miles driven by the rate to find your total deduction.
• Actual Expense Method:

This method involves keeping track of your actual vehicle-related expenses and determining what portion of those expenses applies to business use. This method may be more complex but could result in a larger deduction. Expenses to include are fuel, maintenance and repairs, lease or rental payments, insurance, registration fees and licenses, and depreciation.

To calculate your deduction using this method:

• Figure out the percentage of your vehicle use that was for business purposes by dividing your business miles driven by your total annual miles.
• Multiply your business use percentage by your total vehicle expenses to determine your deductible amount.

Record-Keeping:

Regardless of the calculation method chosen, it is crucial to maintain accurate records to support your mileage deduction claim. Keep a log of your trips, including the time and date, total distance covered (starting and ending mileage), destination, and purpose of each trip. You can use a mileage-tracking app or a written logbook for this purpose.

Actual expenses vs. standard mileage deduction

The IRS offers two ways of calculating the cost of using your vehicle for business: the Actual Expenses method and the Standard Mileage method. Each method has its advantages and disadvantages, and they often produce vastly different results.

Actual Expenses Method

To use the actual expenses method, 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 the miles you drive are for business and half are for personal use, you will multiply your total vehicle expenses by 50% to arrive at the business portion. Some of the costs you can include in your actual expenses are maintenance, title, licensing, registration fees, and vehicle depreciation.

Standard Mileage Method

The standard mileage method is a much 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 simply keep track of your business and personal mileage for the tax year. As with other tax deductions, you'll need to determine the percentage of your mileage that applies to your business. The standard mileage rate for 2023 is 65.5 cents per mile. This amount increases to 67 cents per mile for 2024.

Each year, calculate your expenses using both methods and then choose the one that gives you the largest deduction and the greatest tax benefit. If you use the actual expense method in the first year, you must continue to use this method for that specific vehicle in future years. However, if you use the standard mileage rate method in the first year, you can switch freely between the methods from year to year.

Business insurance costs

The cost of business insurance varies depending on the type of business and the level of coverage required.

In 2023, the national median monthly cost of a business insurance policy for new customers of Progressive Insurance ranged from $42 for professional liability to $67 for workers' compensation. However, the cost of business insurance can be as low as $14 a month or $168 a year for contractor's tools and equipment insurance, or as high as $1,740 a year for cyber liability insurance.

The average cost of a small business owner's policy is $57 per month or $684 per year. This policy typically includes general liability insurance, commercial property insurance, and business interruption insurance.

The cost of business insurance is determined by several factors, including the industry, operations, business size, number of employees, revenue, and claims history. The value of the business property, the number of employees, the age and size of the business, the type of business, the types of coverage, and the claims history can all impact the cost of insurance.

Some ways to save on business insurance costs include:

• Bundling insurance policies: Combining multiple types of coverage into a single policy, such as a Business Owner's Policy (BOP), can often result in lower rates.
• Paying the premium annually: Some insurers offer discounts for paying the full premium amount upfront for the year, rather than on a monthly basis.
• Raising the deductible: Increasing the deductible, or the amount the policyholder must pay before the insurance coverage kicks in, can lower the overall cost of the premium.
• Lowering risks: Taking proactive steps to reduce potential risks in the business, such as installing safety features or implementing workplace safety programs, can help lower insurance costs.

It is important to note that the cheapest business insurance policy may not always be the best option. Business owners should carefully consider their specific needs and select a policy that provides adequate coverage for their business.

Frequently asked questions