Auto Mileage Tax: The Insurance Question

Auto mileage tax may cover insurance, but it depends on the purpose of your vehicle usage. If you use your vehicle for business-related reasons, you may be able to deduct part of your car insurance premiums as a business expense. This includes self-employed individuals, armed forces reservists, qualified performing artists, and fee-based state or local government officials. However, if you use your vehicle only for personal use, you likely cannot deduct your car insurance premiums from your taxable income.

Mileage reimbursements and insurance

When employees use their personal vehicles for work, they are putting a valuable asset at risk for the company's gain. Therefore, a company vehicle reimbursement plan should cover more than just the obvious expenses like gas, oil changes, maintenance, and tires. The costs of vehicle ownership like insurance, taxes, and registration should be reimbursed as well.

Mileage Reimbursement

The standard IRS mileage deduction is 54.5 cents per mile. This rate is meant to reimburse employees for a variety of car-related expenses incurred when the vehicle is used for business travel. The pay typically exceeds the average cost of fuel for the distance driven. The additional funds are viewed as a payment for wear and tear and long-term costs, such as an oil change, new tires, auto insurance, and registration fees.

The standard mileage rate for 2023 is 65.5 cents per mile. If you use the standard mileage rate, you cannot deduct auto insurance premiums as a separate expense. However, you can still deduct tolls and parking fees.

Actual Expenses vs. Mileage

When driving your own vehicle for business, you can choose to deduct actual expenses instead of accepting the standard business mileage deduction rate. Using this method, you calculate the miles driven for business and personal use, as well as the total expenses associated with the car. If you used the vehicle 75% for business, then 75% of the actual expenses are deductible. Expenses include the cost of gas, oil changes, car washes, tolls, repairs, insurance, registration, and parts.

Fixed and Variable Rate Reimbursement

A better approach to reimbursements may be to pay a fixed monthly stipend for predictable expenses like depreciation, insurance, taxes, and registration, and a smaller mileage reimbursement rate for expenses tied directly to business mileage. This way, the reimbursement will always match the expenses, regardless of the number of trips taken. This approach is known as the fixed and variable rate reimbursement, or FAVR.

Mileage Logs and Expenses

If you or your employees are charging mileage to the company, it is necessary to keep an accurate mileage log. An employee's log should include the starting and stopping odometer readings for each portion of a business trip. If you are tracking mileage expenses using the actual expenses method, mileage readings should include the starting and stopping odometer readings for all trips, so you can easily determine the business use of the car. Keep track of all expenses incurred for the car, and retain copies of your receipts and invoices.

Self-employed individuals and insurance

Self-employed individuals can deduct various expenses from their taxes, including auto insurance. However, this only applies if you use your vehicle for business purposes. If you use your vehicle for both personal and business purposes, you can only deduct the cost of its business use.

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

Standard Mileage Rate Method

According to the IRS, the standard mileage rate for 2024 is 67 cents (or $0.67) per mile. This method is more straightforward than working out actual expenses, as the rate covers all expenses of owning and running your vehicle for business purposes. With the standard mileage rate method, you can deduct an amount per mile driven, along with tolls and parking fees incurred for business purposes.

To qualify for the standard mileage rate method, you must own or lease the car(s) you drive for business. You must choose to use this method in the first year the car is available for use in your business. In later years, you can switch to the actual expenses method.

Actual Expenses Method

The actual expenses method requires more work, as you have to keep records of all expenses. However, it might be more financially beneficial, depending on the cost of your car and how expensive it is to run. This method allows you to claim deductions for expenses related to owning and operating a vehicle for business purposes. Deductible expenses include depreciation or rental and lease payments, parking fees and tolls, trailer rental costs, and interest payments on your personal car loan.

If you use the actual expenses method in the first year your vehicle is available for business, you won't be able to switch to the standard mileage rate method in subsequent years.

Record-Keeping

Regardless of the method you choose, the IRS has specific record-keeping requirements for mileage tax deductions. For all business-related mileage expenses, the IRS requires self-employed individuals to log the following:

• Mileage for each business use
• Total mileage for the year
• Time, place (your destination), and purpose

Records should be kept at or near the time of the incurred expense. The IRS accepts methods such as trip diaries, logs, and Excel sheets.

Other Considerations

When calculating your tax deductions, it's important to determine the percentage of your vehicle use that is for business or personal use. This will impact the amount you can deduct. Additionally, certain expenses, such as parking fees, tolls, and related costs incurred when conducting business, may qualify for deductions. However, these costs do not qualify for deductions if you're commuting to your place of work.

Actual expenses method

The actual expense method is one of two ways to calculate the amount of a deductible car expense, the other being the standard mileage rate method. The actual expense method is a more complex process than the standard mileage method. It involves determining the tax deduction by tracking all of the actual expenses of using your vehicle and then deducting the portion of the expenses attributable to your business based on the percentage of the car used for business purposes.

For example, if you use your vehicle for business purposes 50% of the time and have the following expenses:

• Depreciation = $5,000
• Registration and license fees = $100
• Total expenses = $10,100

You would multiply this number by 0.5 (50%) to get the amount of the deduction: 10,100 x 0.5 = $5,050.

Other typical expenses that are usually tracked and deducted include:

• Registration and license fees
• Maintenance (such as oil changes)
• Gas
• Oil
• Repairs
• Tires
• Insurance
• Lease payments
• Tolls and parking fees for business trips
• Auto club dues (such as AAA)

The actual expense method can be used by anyone, as long as they keep track of all their expenses and have good records, including receipts. These records must be kept for three years in case of an audit.

If you use the actual expense method in the first year, you will not be able to switch to the standard mileage allowance method in subsequent years. However, if you use the standard mileage allowance method in the first year, you will be allowed to switch to the actual expense method in later years, as long as the vehicle is not fully depreciated.

Standard mileage rate method

The Internal Revenue Service (IRS) offers two ways of calculating the cost of using your vehicle for business: the standard mileage rate method and the actual expense method.

The standard mileage rate 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.

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

• Not operate five or more cars at the same time
• Not have claimed a depreciation deduction for the car using any method other than straight-line
• Not have claimed a Section 179 deduction on the car
• Not have claimed the special depreciation allowance on the car
• Not have claimed actual expenses after 1997 for a leased car

If you use the standard mileage rate method for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.

For a leased car, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate.

The standard mileage rate for 2023 is 65.5 cents per mile. This amount increases to 67 cents per mile for 2024.

Business use of a vehicle

If you use your vehicle for business purposes, you may be eligible for a tax deduction. This applies to both business owners and self-employed individuals. The tax deduction can be claimed on cars used 100% or partially for business. If the car is used for both business and personal purposes, only the business-use portion of the expenses can be claimed.

There are two methods to calculate the tax deduction: the standard mileage rate method and the actual expense method.

Standard Mileage Rate Method

The standard mileage rate method uses a set IRS rate that can be applied to calculate tax deductions per business mile driven. This method is more straightforward than the actual expense method, as the rate covers all expenses of owning and running your vehicle for business purposes. The standard mileage rate for 2024 is 67 cents per business mile driven, up from 65.5 cents in 2023.

To qualify for the standard mileage rate method, you must own or lease the car(s) you drive for business, and you must choose this method in the first year of the car's operation in your business. This method is not available if you:

• Claimed depreciation deductions on the car (other than the straight-line method)
• Claimed a Section 179 deduction or the car's Special Depreciation Allowance
• Operate five or more vehicles for your business (fleet operations)
• Are a rural mail carrier who receives a qualified reimbursement
• Claimed actual car expenses for a leased car after 1997

Actual Expense Method

The actual expense method requires determining how much you spend to operate your car for business. This method includes the following costs related to business use:

• Maintenance and repairs
• Depreciation or lease payments
• Vehicle registration fees
• Parking fees and tolls
• Trailer rental costs (when hauling tools or instruments)
• Interest payments on your personal car loan

The actual expense method generally requires more record-keeping, but it might offer greater financial benefits, especially if your car is worth more than average or is more costly to operate and maintain.

Tips for Claiming Tax Deductions for Vehicle Expenses

• Keep excellent records: Record your business use of your car diligently, such as keeping a log of business miles driven and receipts for gas and repairs.
• Determine your business use of the vehicle: Using your records, calculate the percentage of your car used for business purposes.
• Compare standard mileage and actual expenses: If eligible, determine your tax savings with both methods and choose the one that gives you the larger deduction.
• Do not use standard mileage if you take the Section 179 deduction: You cannot use the standard mileage deduction if you've taken the Section 179 deduction in the same year. Instead, use the actual expense method.

Frequently asked questions