Auto Insurance Deductibles: Business Expense Or Personal Cost?

Auto insurance can be tax-deductible for business, but it depends on several factors. If you use your vehicle for business-related reasons, you can deduct part of your car insurance premiums as a business expense. This applies to self-employed individuals and business owners who drive their car for work. It also includes certain employees who use their car for business purposes and will not be reimbursed by their employer. The amount you can deduct depends on the percentage of commercial usage versus personal usage. If you use the standard mileage rate, you cannot deduct auto insurance premiums separately. However, you can still deduct tolls and parking fees.

Self-employed individuals can deduct auto insurance

Self-employed individuals who use their car for business purposes can frequently deduct their auto insurance premiums. This is because, when using a vehicle for business, you can deduct various expenses from your taxes, including auto insurance.

However, it is important to note that you may be better off taking a mileage deduction when figuring out the best tax strategy for your business vehicle. Review both options with a tax advisor to make sure you choose the most advantageous way to take the deduction.

If you use your car for both personal and business purposes, the tax deduction will depend on the percentage of commercial usage versus personal usage. For example, if you work 40% of the time, you can deduct only up to 40% of your costs.

If you decide to deduct actual expenses rather than mileage, you can deduct your insurance costs and other expenses such as registration licenses and fees. If you plan to take actual deductions, make sure to keep receipts from all maintenance and other costs to validate your claims.

Self-employed individuals who file a personal return will track expenses on Schedule C. On Schedule C, you’ll see a section to list all expenses in Part II. This is where you’ll track auto expenses. Line 9 summarizes the car or truck expenses. Line 13 tracks the vehicle’s depreciation, and Line 15 is devoted to all business insurance expenses other than health insurance. These line items, along with all the other expenses in your business, will be tallied on Line 28.

Armed forces reservists can deduct auto insurance

To report these expenses, reservists should first complete Form 2106, Employee Business Expenses. On Schedule 1 (Form 1040), line 12, they can then enter the part of their expenses, up to the federal rate, included on Form 2106, line 10, that is for reserve-related travel more than 100 miles from their home.

In addition to reservists, self-employed individuals who use their car for business purposes frequently deduct their car insurance premiums.

Commercial auto insurance

There are several factors that influence commercial auto insurance rates. One significant factor is the driving records of the individuals operating the vehicles. A history of accidents, traffic violations, or DUIs can raise premiums due to the higher risk. External variables such as industry regulations, market trends, and insurance industry dynamics can also impact premiums.

Businesses that may benefit from commercial auto insurance include contractors (such as electrical, excavation, plumbing, and HVAC), retail stores (for deliveries, events, and advertising), and wholesalers and distributors. Any vehicle used to transport people for a fee, such as taxis, limousines, and non-emergency medical transportation vehicles, must be insured by a commercial auto policy.

Actual expenses vs standard mileage deduction

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

Actual Expenses Method

The actual expenses 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 the miles you drive are for business, you will multiply your total vehicle expenses by 50% to get to the business portion. 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, and vehicle depreciation.

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 simply keep track of your business and personal mileage for the tax year. The standard mileage rate for 2023 is 65.5 cents per mile. This amount increases to 67 cents per mile for 2024.

There is no hard and fast rule for which method will always give you the highest deduction. Each method has its advantages and disadvantages, and they often produce vastly different results. You can calculate your expenses using both methods each year and then choose the method that yields a larger deduction and a greater tax benefit to you.

The standard mileage rate method is generally better if:

• You drive a smaller car, particularly if you drive many business miles.
• You drive an old or inexpensive vehicle.
• You don't want to keep receipts.
• You drive a lot of miles in a year.

The actual expenses method is generally better if:

• You have a more expensive vehicle.
• You don't have a lot of business miles per year but have a lot of car expenses.
• Your car is expensive to maintain, gets terrible gas mileage, or is older and needs lots of work.
• Your car is newer, as you will likely be able to get a larger depreciation deduction in the first few years of your car's life.

When to consult a tax professional

There are several instances where it is advisable to consult a tax professional to ensure you are taking the right approach to your auto insurance deductions. Tax laws change frequently, and a professional will be able to advise you on the latest tax guidance and how it applies to your business.

Firstly, if you are unsure whether your auto insurance is tax-deductible, a tax professional can advise you on the best course of action. They will be able to tell you if you are better off taking the standard deduction or itemizing your deductions. They can also advise on whether you can deduct your homeowners' insurance premiums.

Secondly, if you are unsure how to calculate your business vehicle expenses, a tax professional can help you decide between the standard mileage rate and the actual expense method. They can also advise on how to calculate the percentage of costs that can be attributed to business use.

Thirdly, if you are a business owner, a tax professional can review the IRS guidelines for business expenses and confirm that you are entitled to these and other tax deductions.

Finally, if you are unsure whether you have the right insurance for your business vehicle, a tax professional can advise you on the correct coverage for your needs.

Frequently asked questions