Freelancers' Guide To Deducting Auto Insurance Expenses

As a freelancer, you can deduct the cost of your car insurance premiums as a business expense. This is applicable if you use your vehicle for business purposes. If you use your car for both business and personal purposes, you can deduct the percentage of the total expenses that is business-related. For example, if 70% of the miles you drive are for business purposes, you can deduct 70% of your auto insurance premiums. This is known as the Actual Expenses method. Alternatively, you can use the Standard Mileage method, which is a deduction based on the number of miles you drive for business purposes.

Deducting auto insurance as a self-employed individual

If you're self-employed and use your vehicle for business purposes, you may be able to deduct your auto insurance premiums from your taxable income. This is because the IRS allows taxpayers to file the actual expense incurred or use the standard mileage rate for deductions.

Actual Expense Method

If you use the actual expense method, you can deduct the percentage of your vehicle expenses that were for business use. For example, if 30% of your vehicle's usage was for business, you can deduct up to 30% of your eligible vehicle expenses, including auto insurance premiums. Other eligible expenses include:

• Car payments
• Depreciation
• Registration
• Garage rent
• Licenses
• Repairs and maintenance
• Parking and toll fees

Standard Mileage Method

With the standard mileage method, you can deduct a flat rate for each mile driven for business. The standard mileage rate was 54.5 cents per mile in 2018, 58 cents in 2019, and 65.5 cents in 2023.

You can choose either method and change from year to year without penalty. You can calculate your expenses using both methods and then select the one that gives you the highest deduction.

Record-Keeping

To claim these deductions, you must keep accurate records of your driving history, including the starting and ending mileage for each trip and the reason for the trip. You should also keep receipts for any business-related automotive expenses, such as gas and repairs.

Choosing between actual expenses and standard mileage deduction

When it comes to deducting auto insurance for freelancers, there are two methods: the standard mileage deduction and the actual expenses method. Both methods have their own advantages and disadvantages, and it is important to calculate your expenses using both methods to determine which yields a larger deduction and greater tax benefit.

Standard Mileage Deduction

The standard mileage deduction is a simplified method where you can deduct a set rate for each business mile driven. This method does not require detailed expense tracking, but it does require a detailed mileage log. The standard mileage rate for 2024 is 67 cents per mile, which is meant to cover all vehicle costs, including gas, maintenance, insurance, and depreciation. This method is simple and easy to track, and it requires less record-keeping and paperwork. However, it may not accurately reflect actual expenses and may not be the best option for high-value vehicles with low mileage.

Actual Expenses Method

The actual expenses method involves deducting the actual costs of operating your vehicle for business purposes. This method requires detailed records of all vehicle expenses, including car payments/lease payments, license and registration, maintenance, and depreciation. You also need to know the percentage of business and personal use for each expense. This method provides a more accurate reflection of vehicle-related costs and can be more beneficial for high-value vehicles with low mileage. It also allows for a more comprehensive tax deduction. However, it requires more record-keeping and paperwork and may be more complex to calculate and track.

Choosing Between the Two Methods

There is no hard and fast rule for which method will always give you the highest deduction. It is recommended to calculate your expenses using both methods and choose the one that results in a larger deduction. Some signs that the standard mileage deduction may be right for you include having a car that doesn't require a lot of upkeep, getting decent gas mileage, or driving a lot of miles in a year. On the other hand, if your car is expensive to maintain, gets terrible gas mileage, or is an older car that needs a lot of work, you may be able to deduct more with the actual expenses method. Additionally, if your car is newer, you may be able to get a larger depreciation deduction in the first few years of its life.

Splitting expenses for personal and business use

As a freelancer, you can deduct car expenses based on the percentage of business use for the vehicle. For example, if you use your car 30% of the time for business and 70% for personal use, you can deduct up to 30% of your eligible vehicle expenses.

The IRS allows you to file the actual expense incurred or use the standard mileage rate. The standard mileage method involves counting up the miles that you drove for work and deducting a flat rate for each mile. In 2023, the IRS business mileage rate is 65.5 cents per mile.

If you decide to use actual car expenses, this includes auto insurance, payments, depreciation, registration, garage rent, licenses, repairs and maintenance, and parking and toll fees.

To work out the percentage of your car expenses that are deductible, you need to keep accurate records to establish the business use of your vehicle. This involves tracking your mileage to determine what percentage of car costs qualify as tax-deductible.

Tracking mileage for business and personal use

Tracking your mileage is essential if you want to deduct auto insurance as a freelancer. The IRS requires you to keep a detailed log of trips, including the date, number of miles, and purpose of each trip. This is necessary whether you choose to deduct your expenses using the actual expense method or the standard mileage rate.

There are several mileage-tracking apps available that can help you with this process, and choosing the right one will depend on your specific needs. Here are some things to consider when selecting a mileage-tracking app:

• Cost: Most apps offer a free version or plan with limited features or usage. Paid plans typically offer more advanced features and unlimited usage. Consider your budget and how often you drive for work when choosing a plan.
• Features: Some apps offer simple mileage tracking, while others include additional features such as expense tracking, route planning, and integration with accounting software. Decide which features are most important to you before making a decision.
• Ease of use: Choose an app with an intuitive user interface that is easy to navigate and use. This will save you time and hassle in the long run.
• Customer support: Look for an app that offers good customer support in case you have any issues or questions. This could include a self-help library, live chat, email support, or a dedicated customer success manager.
• Reviews: Check third-party reviews to see what other users have to say about the app. This can give you valuable insights into the app's functionality, ease of use, and customer service.
• Zoho Expense: An all-in-one travel and expense management app with four different ways to track mileage. It offers a free plan and additional paid plans with more features.
• QuickBooks Online: A popular accounting software that includes a built-in mileage tracker. It is expensive but offers a comprehensive solution for mileage tracking and accounting.
• Everlance: Offers automatic GPS tracking and the ability to classify mileage and expenses as personal or business. It has free and paid plans for self-employed individuals and small businesses.
• FreshBooks: Includes a mileage-tracking app that automatically logs trips and saves your travel history. It is good for small businesses that want to track miles for tax purposes.
• MileIQ: A simple and affordable mileage-tracking app that focuses on standalone mileage tracking. It has a free plan and two paid plans for individuals and teams.
• TripLog: A flexible mileage tracker with multiple tracking options and complementary features such as expense tracking and route planning. It offers a free plan and several paid plans with additional features.

Remember, accurate record-keeping is essential when deducting auto insurance and other vehicle expenses as a freelancer. Choose a mileage-tracking app that suits your needs and use it consistently to ensure you have the necessary documentation come tax time.

Consulting a tax professional for advice

• Expertise and Knowledge: Tax professionals are experts in the field and stay up-to-date with the latest tax laws, regulations, and deductions. They can help you navigate the complex world of tax deductions and ensure you're claiming all eligible expenses related to your vehicle.
• Accuracy and Compliance: Tax professionals will help you accurately calculate and report your vehicle-related expenses. They will ensure you're meeting the requirements set by the IRS, reducing the risk of errors or non-compliance.
• Deduction Strategies: These experts can advise you on the best approach to maximize your deductions. For vehicle expenses, you usually have two options: actual car expense deduction or standard mileage deduction. A tax professional can evaluate your situation and recommend the most advantageous method for you.
• Record-Keeping and Documentation: They will guide you on proper record-keeping practices, ensuring you have the necessary documentation to support your deductions. This includes tracking mileage, separating personal and business expenses, and retaining receipts for eligible expenses.
• Time Savings: Preparing and filing taxes can be time-consuming, especially if you're unfamiliar with the process. By hiring a tax professional, you can save valuable time and focus on your freelance work.
• Additional Tax Savings: Tax professionals can identify other tax-saving opportunities beyond vehicle deductions. They will assess your financial situation and advise on strategies to lower your tax liability, such as retirement contributions, home office deductions, or business insurance premiums.
• Audit Support: In the event of an audit, a tax professional can provide valuable assistance and representation. They will help you navigate the audit process, answer any questions from the IRS, and ensure your rights are protected.
• Peace of Mind: Consulting a tax professional gives you peace of mind, knowing that your taxes are being handled correctly and comprehensively. They can answer your questions, address concerns, and provide ongoing support throughout the tax year.

Remember, each situation is unique, and tax laws can be complex. Consulting a qualified tax professional will ensure you're making informed decisions and maximizing your tax benefits as a freelancer.

Frequently asked questions