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How to deduct car insurance as a business expense

Are you leaving money on the table when you travel for work?

Deducting car expenses for business travel can significantly cut down on your taxes. To get the most from your deductions, you’ll need to know what’s fair game and what to look out for.

When can I deduct car insurance as a business expense?

Almost every business owner, self-employed person or employee who uses a car for work-related travel can deduct car expenses, including insurance.

Jobs involving travel, client consulting and transportation can benefit the most from business deductions, including:

  • Rideshare drivers like Uber or Lyft
  • Service personnel including roadside mechanics and delivery services
  • Photographers, videographers and media personnel
  • Salespeople
  • Business leaders including CEOs and managers
  • Any business owner or employee who travels regularly

Eligible vehicle business deductions

  • Licence and registration fees
  • Fuel and oil costs
  • Insurance
  • Interest on money borrowed to buy a motor vehicle
  • Maintenance and repairs
  • Leasing costs

These business travel-related expenses are also eligible:

  • Client or business meetings. Yes, traveling to that coffee shop to meet clients counts.
  • Conferences. Driving to industry events that improve your job expertise can be a deduction.
  • Business errands. These can include bank and post office visits or lunch pickups.
  • Temporary locations. Moving your daily job location temporarily for less than a year, like a photographer traveling to a short-term photo shoot site.

What’s not eligible for a deduction

  • Commuting. Your drive to or from work cannot be deducted.
  • Fines. You can’t deduct fees from a parking or speeding ticket.
  • Reimbursed travel. Employees who get reimbursed for car expenses may not be able to claim a deduction since they’ve already been reimbursed by their employer.

How much can I deduct for my car insurance?

If you use your car exclusively for business, you can deduct 100% of your car expenses. This applies if you drive a company car or are a self-employed salesperson, for example.

If you use your car for a mix of business and personal driving, keep track of the percentage of time you traveled for business purposes. In other words, if you drove your personal vehicle for business 75% of the time, you can only claim 75% of your car expenses.

The easiest way to keep track of this is to keep a log of every business-related thing you use your car for. If you’re self-employed it can be especially easy to track. Apps like QuickBooks Self-Employed track your trips and mileage and sort it all for you. Remember to keep track all your expenses and keep all your receipts for things like gas and repairs too.

Reasonable per-kilometre allowance

The type of vehicle and the driving conditions usually determine whether the CRA considers an allowance to be reasonable. The per-kilometre rates that are usually consider reasonable are the amounts prescribed in section 7306 of the Income Tax Regulations. Although these rates represent the maximum amount a business owner can deduct as business expenses, they can be used as a guideline to determine if the allowance paid to an employee is reasonable.

How do I calculate my actual business travel expenses?

Let’s say you drove 15,000 business kilometre and 20,000 total kilometres this year, and your annual car insurance premium was $1,440. Divide the business kilometres driven (15,000) by the total miles driven (20,000), which gives you 75% — the percentage of miles used for business purposes.

Next, multiply the percentage (.75) for each of your car expenses. For example, if your car insurance annual premium was $1,440, you can deduct 75% of that, or $1,080. If you spent $2,000 on gas, you’ll deduct $1,750 for business purposes.

How to file a loss after an accident

If your car was damaged in an accident, you can still write off the business portion of it as a loss as long as you don’t include any reimbursement from your insurance company.

  1. File a claim with your insurance.
  2. Calculate your adjusted basis on the car before the accident based on this formula: Adjusted basis = cost of the car + improvements – any depreciation deducted or previous losses
  3. Subtract any reimbursement you get from your insurance company or other sources. You can include your deductible as part of the loss.
  4. Claim the final unreimbursed amount.
  5. Save your receipts and damage reports so you can prove the car’s costs and damage if you’re ever audited.

Case study: Filing a loss after an accident

For a 2010 Camry that was written off after an accident, the tax deduction you can claim might look like:

  • $10,000 adjusted basis car value = $20,000 MSRP + $0 improvements – $10,000 depreciation
  • $8,000 cheque from insurance = $10,000 payout – $2,000 deductible
  • $2,000 deduction is the final amount you can claim

How do I deduct car insurance as a business expense?

To deduct car insurance as a self-employed person you’ll fill in line 9281 of form T2125. You can also claim the cost of a motor vehicle as a deduction over time through the Capital Cost Allowance (CCA) on line 9936. Keep detailed records of mileage and expenses if you need to prove your deduction later.

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How much can I save with a car insurance deduction?

A lot of people mistakenly think a deduction will cut your taxes down dollar-for-dollar. However, a $100 deduction doesn’t mean you’ll owe $100 less in taxes.

Instead, a deduction will simply reduce the amount of income you need to pay taxes on. How much you save will depend more on your tax bracket.

Case study: How much deductions save on your refund

Let’s pretend you make $50,000 a year and qualify for a $1,080 car insurance deduction, and you fall under a 25% tax bracket.

The $1,080 car insurance deduction means that you’ll pay taxes on $48,920 instead of the total income you made. This taxable amount is your total income minus the deduction: $50,000 – $1,080 = $48,920. That means you have less taxable income, but won’t get the exact deduction of $1,080 as a refund.

To calculate how much you saved, multiply the deduction by your tax bracket: $1,080 .25. This is the amount you would have paid if you hadn’t taken the deduction. In this case, $1,080 .25 = $270, the total amount you’re saving with your deduction.

What should I watch out for while deducting business expenses?

There are a few caveats to deducting car insurance as a business expense:

  • Deduct actual vehicle expenses. You can only claim deductions like car insurance if you itemize actual vehicle expenses.
  • Keep detailed records. Keep receipts and records of mileage as proof of your deduction in case you’re audited. Self-employment apps are great here.
  • What if you’re reimbursed for travel? As an employee, you can only deduct car expenses when your employer doesn’t reimburse you completely or separately for your costs.

Bottom line

If you’re a business owner or self-employed, you probably qualify for car expense deductions up to and including car insurance when you’re filing the actual expenses on your vehicle. In order to separate business use of you car from personal use, make sure you track your mileage and expenses and keep your receipts in case of an audit.

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