When is car insurance deductible as a business expense?
I use my car for business purposes, but I'm confused about what I can deduct as a business expense when it comes to the insurance costs. Does it matter whether I use the car for business and personal use? What expenses are deductible, and how can I deduct them?
Let me start by saying that insurance deductions are tricky business. You obviously need to make sure you qualify for the deduction, but you also want to be sure you're getting the most bang for your buck when you're using the vehicle in your business. Let's dive into some of the details of how car insurance deductions work as a business expense.
There are two big things you need to keep in mind when you want to deduct auto insurance premiums as a business expense:
- Business-use policy: The firs thing to keep in mind is that to deduct auto insurance as a business expense, you have to have a business-use policy. These policies are generally a bit pricier than standard personal- use policies, but are required if you're using the vehicle in a business. So chances are if you're using the vehicle in a business already, you have this policy.
- Mixed use: You can deduct what actually counts as business use. So if you only use the vehicle for business, all of the expenses associated with the vehicle are deductible (insurance premiums, gas and maintenance included). If the vehicle is for personal use, you can deduct the portion of the expenses that count as business expenses. If you use the vehicle 50% for business and 50% for personal use, you can deduct 50% of the expenses.
Let's summarize so far: If you have a business-use policy and use your vehicle at least in part for your business, you can deduct some (or maybe all) of the cost of your insurance premium.
How does the deduction work?
I have a business-use auto insurance policy and I use my vehicle for business purposes. How does this deduction work and how do I take advantage of it?
You have two options when you're deducting auto insurance: the standard IRS deduction or calculating your own expenses. Let's talk about what each means in greater detail.
- Standard deduction: The standard deduction is what it sounds like - it's a standard rate that the IRS has calculated if you aren't itemizing your expenses. In 2018, the standard deduction was 54.5 cents per mile.
- Itemized deduction: If you're going to itemize, you need to document all expenses carefully throughout the year. This includes insurance and anything else related to your vehicle that you're planning to deduct. This is even more important if you use the car for business and personal use, to prove what portion is strictly related to business use.
Your employment status determines which form you'll file to write off your insurance costs:
- Self-Employed: You'll file a Schedule C.
- Employed by a third party: You'll file a Form 2106 - Employee Business Expenses.
We always recommend that you speak to a tax expert before claiming your auto insurance as a business expense or filing any forms. Just think of it as double-checking any work you've done on your own.
Which option will save me the most money?
I want to save the most money possible, so which is better: the standard or the itemized deduction?
The answer to this question is not as cut-and-dried as most people might think. There is no "best choice" that suits everyone. Honestly, it depends on all of the factors we discussed above: how often you're using the vehicle for business, the total expenses that means you can deduct, and how that measures up to the standard deduction.
Naturally, you'll choose the option that saves you more. So while it would be great if there was a clear answer, there isn't.