Mileage Rate And Auto Insurance: What's Deductible?

If you use your vehicle for business purposes, you may be able to deduct auto insurance from your taxable income. The Internal Revenue Service (IRS) allows taxpayers to deduct the expense of using their personal vehicles for business, charitable, or medical purposes. This can be calculated using either the standard mileage rate method or the actual expense method. The standard mileage rate for 2024 is 67 cents per mile, which includes the average cost of car insurance. However, if you choose to use the standard mileage rate, you cannot also deduct car insurance payments separately. On the other hand, the actual expense method allows you to deduct the business percentage of every vehicle expense, including car insurance. It's important to note that commuting to and from work is generally not considered a business expense.

Self-employed people can deduct car insurance

The standard mileage rate method is a simplified way of deducting car expenses to make tracking easier for independent workers. The IRS looks at the average costs of operating a vehicle and sets a standard rate per mile that can be deducted. This rate includes the average costs of gas, car insurance, car payments, lease payments, maintenance, and depreciation. For 2024, the standard mileage rate is 67 cents per mile. This method is best if you have a newer car that doesn't require a lot of upkeep and gets decent gas mileage.

The actual expense method involves deducting the business percentage of every vehicle expense incurred, including car insurance, car payments/lease payments, depreciation, registration, repairs, and maintenance. This method may be more beneficial if you have an older car that requires significant maintenance and repairs.

It's important to note that you can't deduct both mileage and actual car expenses. You must choose one method and stick to it. Additionally, commuting to a regular place of business is not deductible, but driving to client meetings or events may be.

When it comes to filing your taxes, if you're self-employed, you'll report your vehicle expenses on Schedule C. It's essential to keep detailed records of each trip's date, mileage, and purpose to support your deductions.

Reservists, performing artists and government officials may also qualify

Reservists, performing artists, and government officials may qualify for tax deductions on their car expenses, including car insurance premiums, if they use their vehicles for business purposes. This can be done through the standard mileage method or the actual expense method.

The standard mileage method involves using a standardised rate per mile that independent drivers can deduct, factoring in the average costs of operating a vehicle, such as gas, insurance, lease payments, maintenance, and depreciation. For the 2024 tax year, the standard mileage rate is 67 cents per mile. It is important to note that this method cannot be used if you rent your car, and you must choose to use this method in the first year your car is available for business use.

The actual expense method, on the other hand, involves deducting the business percentage of every vehicle expense incurred, including car payments, lease payments, and licenses. This method can be used if you rent your vehicle, and you can deduct lease payments.

Armed Forces reservists, qualified performing artists, and fee-basis state or local government officials can use Form 2106, Employee Business Expenses, to figure out the deductions for their car expenses. Reservists can deduct expenses related to travelling more than 100 miles from their primary residence to their place of service. Performing artists must have worked for at least two employers during the tax year, received at least $200 from each employer, had job-related expenses exceeding 10% of income, and have an adjusted gross income of $16,000 or less. Fee-based government officials are compensated entirely or partly on a fee basis rather than a salary and can deduct job-related business expenses.

Mileage reimbursements may not cover insurance and depreciation

Mileage reimbursements are a way to offset the costs of using a personal vehicle for work. The most common mileage rate in the United States is the standard business rate published annually by the IRS. This federal rate or "safe harbor rate" is considered a reasonable and fair way to reimburse employee vehicle expenses. The standard mileage rate for 2023 is 65.5 cents per mile, and for 2024, it is 67 cents per mile.

While the standard mileage rate is meant to cover a range of costs associated with owning and operating a vehicle used for business, it may not adequately cover certain expenses, such as auto insurance and depreciation. Auto insurance and depreciation can make up a significant portion of the annual costs of owning and operating a vehicle, typically around 60%. Therefore, if a company's vehicle reimbursement policy does not sufficiently account for these expenses, employees may be left paying for them out of their own pockets.

The issue arises because the standard mileage rate is based on average costs, and the reimbursement amount depends on the number of miles driven. So, if an employee does not drive enough miles, their reimbursement may not be enough to cover their fixed costs, such as insurance and depreciation. For example, consider two employees, Driver A and Driver B, who live in the same county, have similar vehicles, and carry the same auto insurance coverage. Driver A travels 500 miles per month, while Driver B travels 2500 miles per month. In this case, Driver B's vehicle travel expenses, such as gas, oil, and maintenance, will result in a higher reimbursement amount, more than enough to cover their higher operational costs. On the other hand, Driver A, with lower mileage, may not receive enough reimbursement to cover their fixed costs.

To address this issue, some organizations use a fixed and variable rate reimbursement approach, also known as FAVR. This method involves paying a fixed monthly stipend for predictable expenses like depreciation, insurance, taxes, and registration, along with a smaller mileage reimbursement rate for expenses directly tied to business mileage. By separating the fixed and variable costs, this approach ensures that employees' reimbursements match their expenses, regardless of the number of trips they make.

Deducting actual expenses vs standard mileage rate

Self-employed drivers can deduct their vehicle expenses as a business expense. The Internal Revenue Service (IRS) offers two ways of calculating the cost of using your vehicle for business: the standard mileage method and the actual expense method.

Standard Mileage Method

The standard mileage method is a simplified way of deducting car expenses to make tracking easier for independent workers. The IRS looks at the average costs of operating a vehicle and sets a standard rate per mile that drivers can deduct. The standard mileage rate includes the average costs of gas, car insurance, car payments, lease payments, maintenance, and depreciation. The standard mileage rate for 2024 is 67 cents per mile, and it was 65.5 cents per mile in 2023.

To use the standard mileage method, you must own or lease the car. You must not operate five or more cars at the same time, claim a depreciation deduction for the car using any method other than straight-line, claim a Section 179 deduction on the car, or claim the special depreciation allowance on the car.

Actual Expense Method

The actual expense method allows you to deduct the business percentage of every vehicle expense you incur, including car payments/lease payments, license and registration, gas, insurance, repairs, tires, depreciation, and more.

Choosing a Method

There is no hard and fast rule for which method will always give you the highest deduction, so it is recommended to calculate your expenses using both methods and then choose the method that yields the larger deduction. The standard mileage method is generally simpler and requires less record-keeping, but the actual expense method might result in a larger deduction, especially if you have high vehicle expenses.

Standard mileage rate for charitable purposes

The standard mileage rate is the default cost per mile set by the Internal Revenue Service (IRS) for taxpayers who deduct the expense of using their personal vehicles for business, charitable, or medical purposes. The standard mileage rate for charitable purposes is based on federal law minimums and is meant to reimburse taxpayers for the out-of-pocket costs of volunteer work.

For the 2023 tax year, the standard mileage rate for charitable purposes is 14 cents per mile, and for the 2024 tax year, it remains unchanged. The standard mileage rate for charitable purposes is the same for all vehicles, including electric, hybrid-electric, gasoline, and diesel-powered vehicles.

Taxpayers can choose to deduct the standard mileage rate or their actual expenses. The standard mileage rate includes average costs such as gas, insurance, lease or car payments, maintenance, and depreciation. If you choose to deduct your actual expenses, you can deduct the business percentage of every vehicle expense incurred, such as car payments, license and registration fees, and more.

If you are taking the standard mileage deduction for charitable purposes, you need to maintain a mileage log book and keep it with your tax records. If you are itemizing your deductible vehicle expenses, you will need the mileage log book and the receipts for every expense you intend to deduct.

Frequently asked questions