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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 bang for your buck, you’ll need to know what expenses are fair game and which type of deduction to use for the most savings.
When can I deduct car insurance as a business expense?
Almost every business owner or employee who uses a car for work-related travel can deduct car expenses, including insurance. You can take this deduction if you drive your car to client meetings, conferences or industry events, business errands like running to the bank or driving to a temporary job location like a photographer snapping photos at a wedding venue.
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
- Business leaders including CEOs and managers
- Any business owner or employee who travels regularly
When are car expenses not tax-deductible?
You can’t deduct your car expenses or insurance premium if you use your car only to commute to work, if you face fines for speeding or incorrect parking or if your employer pays you back for your travel expenses.
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.
How do I deduct car insurance as a business expense?
To deduct car insurance as a self-employed person or single-member LLC, you’ll use Tax Form 1040, Schedule C. Keep detailed records of mileage and expenses if you need to prove your deduction later.
- Calculate your car insurance and other operating expenses using the above method.
- Write the total amount on Schedule C, line 9.
- Show vehicle depreciation on line 13 if needed.
- If you paid rent or leasing fees, write those expenses on line 20a.
- On Part IV of the form, detail information about the vehicle. Include the date when the car was first used for your business, mileage and whether the car was ever used for personal purposes.
- Consult your tax form instructions to see if you need to submit other additional forms.
- Submit the forms using an online tax filing service or certified public accountant. In addition, you can submit online with the IRS Free File software or Free File Fillable Forms or visit the IRS website for the address to send a paper form, based on the state you live in.
Should I use the standard mileage deduction?
When claiming car insurance on your tax form, you can choose to take the standard deduction — an average set by the IRS — or you can report your actual expenses, depending on which was higher.
Both options can include gas, maintenance, insurance, car repairs, taxes, registration, vehicle loan interest and depreciation. The big difference is that with actual expenses, you need to keep detailed records of how much you spent during the tax year to prove it.
The standard mileage deduction was set to 58 cents per mile for tax year 2019 and 57.5 cents per mile for 2020. You can also claim 17 cents per mile for medical or moving purposes and 14 cents per mile driven for charities in 2020.
But a few rules also changed for 2020. You must use 27 cents per mile as the portion of the standard business mileage as depreciation. Employers can use either the fleet-average valuation rule or the vehicle per-mile valuation rule. $54,000 is the maximum amount you can deduct per vehicle for individuals and employers
If you spent more than that on car-related expenses, you’d calculate your actual costs and deduct that number instead of taking the standard deduction.
How do I calculate my actual business travel expenses?
If you’re not taking the standard deduction, you’ll need to calculate your actual expenses.
Let’s say you drove 15,000 business miles and 20,000 total miles this year, and your annual car insurance premium was $1,440. Divide the business miles 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.
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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
If you make $50,000 a year and qualify for a $1,080 car insurance deduction, you should fall under the 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.
How to report a total loss for a business car on taxes
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.
- File a claim with your insurance.
- 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
- Subtract any reimbursement you get from your insurance company or other sources. You can include your deductible as part of the loss.
- Claim the final unreimbursed amount on Form 4684.
- 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 check from insurance = $10,000 payout – $2,000 deductible
- $2,000 deduction is the final amount you can claim
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. Otherwise, you can opt for the standard deduction, which should include typical vehicle costs.
- Keep detailed records. Keep receipts and records of mileage as proof of your deduction in case you’re audited.
- Calculate both deduction methods. Often, using the standard mileage method will give you a bigger deduction. Calculating actual costs can be a pain, but you may want to calculate both to see which gives you the most benefit.
- 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.
- Don’t get locked into deducting actual expenses. If you claim actual expenses the first year, you’ll get locked into using this method for that car every year after. However, if you go with the standard deduction first, you can choose standard or actual deductions on future tax returns. Consider claiming the standard mileage rate first so you can switch back and forth.
If you’re a business owner, you probably qualify for car expense deductions up to and including car insurance when you’re filing the actual expenses on your vehicle.
But make sure this method actually results in the biggest deduction. Often, the standard mileage rate will give you more bang for your buck.
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