Auto Insurance: Self-Employed Tax Deduction Explained

Self-employed individuals who use their car for business purposes can deduct their car insurance premiums from their taxable income. This is because the car expenses, including insurance, are considered business expenses. However, if the car is used for both business and personal purposes, the expenses must be split, and only the percentage of mileage used for business can be deducted. It is important to note that commuting to and from work is generally not considered a business expense.

Self-employed people can deduct car insurance

To deduct your car insurance, you must file your business expenses (Schedule C) using the "actual vehicle expenses" method. This means itemising the costs associated with using your car for business instead of taking a standard mileage deduction. The standard mileage deduction for 2023 is $0.655 per mile. No matter which deduction method you choose, it is important to keep track of your total annual mileage and the total number of miles driven for business.

If you use the actual expenses method, you calculate your percentage of business use by dividing the number of business miles by your annual mileage. For example, if you drove 15,000 miles, and 8,000 of those were for business, you used the vehicle for business 53% of the time, and you can deduct 53% of your car insurance premium. Accurate record-keeping is critical, and if you are audited, the IRS will want to see a detailed log of your trips.

In addition to car insurance, you can also deduct other vehicle-related expenses, such as gas, repairs, parking fees, and more, using the same percentage of business-use method. It is important to note that your car insurance deductible, which you pay when making a claim, is not usually tax-deductible and is considered a personal expense.

Armed forces reservists can deduct car insurance

The IRS states that:

> If you are a member of a reserve component of the Armed Forces and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct your unreimbursed travel expenses on your tax return. Include all unreimbursed expenses from the time you leave home until the time you return home.

Reservists can first complete Form 2106, Employee Business Expenses, and then enter the unreimbursed expenses on Schedule 1 (Form 1040), line 12.

Qualifying performing artists can deduct car insurance

If you're a self-employed individual who uses their car for business purposes, you can usually deduct your car insurance premiums and other vehicle-related expenses from your taxable income. This also applies to certain other individuals, including qualified performing artists.

Who Qualifies as a Performing Artist for Tax Deduction Purposes?

Under US tax law, a Qualified Performing Artist (QPA) is a taxpayer who meets the following criteria:

• They must have worked as a performing artist as an employee (not an independent contractor) for at least two employers in a tax year.
• The expenses attributed to their work as a performing artist must exceed 10% of their gross income from such services.
• Their adjusted gross income (without this deduction) must not exceed $16,000.
• They must have received wages of at least $200 from each of the two employers.

Qualified performing artists can deduct car insurance premiums and other car-related expenses, such as registration fees, licenses, tolls, and parking fees. They can also deduct the actual vehicle expenses, including repairs, lease payments, and fuel. However, they cannot claim deductions for normal trips between their home and regular place of work, as these are considered private expenses.

To claim these deductions, qualified performing artists must keep records of their car usage and expenses. They can use methods such as the logbook method or the cents-per-kilometre method to calculate their deductions.

Fee-basis state or local government officials can deduct car insurance

If you are a fee-basis state or local government official, you can deduct your car insurance as an unreimbursed employee travel expense. This is because, as a fee-basis state or local government official, you are not the only type of individual for whom car expenses, including auto insurance, are tax-deductible.

Self-employed people make up the majority of those who may deduct their car insurance premiums, but they are not the only ones who qualify. Self-employed individuals who use their car for business purposes frequently deduct their car insurance premiums. However, if you use your car for both business and personal purposes, the expenses must be split. The deduction is based on the portion of the mileage used for business.

There are two methods for figuring out car expenses: the actual expenses method and the standard mileage method. With the actual expenses method, you can deduct car insurance and other items like registration fees, licenses, tolls, and parking fees. On the other hand, the standard mileage method does not allow you to deduct auto insurance premiums as a separate expense, but you can still deduct tolls and parking fees.

If you are a fee-basis state or local government official, you can use Form 2106 to report your expenses.

Deducting car insurance with the 'actual expenses' or 'standard mileage' method

If you use your car for business purposes, you may be able to deduct your car insurance premiums from your taxable income. Self-employed individuals who use their car for business purposes can often deduct their car insurance premiums.

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

The Standard Mileage Rate Method

The standard mileage rate method is a simplified way of deducting car expenses. The IRS has determined a standard rate per mile that independent drivers can deduct, which is meant to cover the average costs of operating a vehicle. The standard mileage rate for 2023 is 65.5 cents per mile. This rate includes the average costs of gas, car insurance, car payments, lease payments, maintenance, and depreciation. It's important to note that if you choose the standard mileage rate method, you cannot also deduct gas or car insurance payments separately. You must also own or lease the car, and not operate five or more cars at the same time.

The Actual Expense Method

With the actual expense method, you can deduct the business percentage of every vehicle expense incurred, including car payments, lease payments, license and registration fees, insurance, gas, oil, repairs, tires, and depreciation. For example, if you use your car for work 65% of the time, you can deduct 65% of your vehicle costs. This method may be more favourable if your car is newer or more expensive to maintain.

You can choose either method and switch between them year to year without penalty. However, you can only use one method per year. It's a good idea to calculate your expenses using both methods to determine which will give you the highest deduction.

Frequently asked questions