Can you claim car insurance as a business expense?
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UPDATED: Jul 14, 2021
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- If you are using your car in the operation of a business, then you should make sure that you have a business vehicle insurance policy with at least the minimum coverage for your state
- You may be able to deduct business vehicle expenses, such as insurance premiums, on your taxes as long as you choose the actual vehicle expenses method of calculating your tax deductions
- You will need to keep accurate records of all of your vehicle expenses to be able to claim them as tax deductions
Car insurance premiums can add up over the year, so it is only natural that you would consider whether they could be taken as a tax deduction.
The good news is that the IRS allows for a deduction of expenses related to the operation of a vehicle for business purposes. The key to being able to take this deduction is to keep very accurate records.
Also, you may want to speak with a tax accountant to determine if this deduction truly applies to you.
Getting Auto Insurance for Your Business Vehicle
If you are already considering whether auto insurance can be deducted as a business expense, then you probably already know that you must have valid insurance for all of your business vehicles.
Remember that your personal auto insurance policy or your business owner’s policy do not cover you if you are in an accident while driving a vehicle for work. This is why you need separate coverage for business vehicles.
The same principles apply to finding the right auto insurance policy for your business vehicles as for your personal ones.
Your best bet is to shop around for the best possible auto insurance quote so that you do not pay too much for auto insurance for your business vehicle.
If you insure multiple cars through the same policy, you may even be eligible for a discount on your rate. You could get a discount by going through the same insurance company that provides your business owner’s policy.
Even though you may be able to deduct the cost of your vehicle insurance for your business, you still have every incentive to pay the lowest premium you possibly can for your auto insurance policy.
You should balance getting the lowest rate possible against your need for coverage above the state required minimum amounts.
This is because many accidents, especially those involving multiple cars or bodily injury, result in damage that costs way beyond the extent of policy limits for a standard auto liability policy to fix.
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Choosing the Right Method for Calculating Deductions for Your Vehicle Expenses
There are two basic methods that can be used to deduct expenses, including the cost of insurance, for your business vehicles.
- Standard Mileage Deduction
- Actual Expenses Method
For standard mileage deduction, you must keep track of the total mileage you have driven for business purposes during a calendar year and multiple it by the standard mileage rate set by the IRS.
The important thing to remember about the standard mileage deduction method is that you cannot deduct the cost of your auto insurance or many other expenses related to the operation of your vehicle if you choose this method.
To take advantage of deducting those expenses, you will need to use the actual expenses method.
The actual expenses method requires that you keep track of each of the expenses that you incur for operating your car during the year and then deduct that exact amount.
Remember that you must have documentation to substantiate all of the vehicle expenses you claim on your taxes. Insurance is one of the costs that you can deduct if you use the actual expenses method of calculating vehicle expenses for that year.
The best way to make sure that you are taking the biggest deduction that you are allowed for vehicle expenses is to calculate your deductions using both methods.
Choose whichever method gets you the biggest deduction, but you must use that method for the calculation of your vehicle expenses for that entire calendar year. You are not allowed to switch methods at any point during the same year.
A major caveat to being able to take a vehicle expense deduction is that if any of your vehicle expenses are reimbursed by your employer, then they are not considered actual losses by the IRS and are not eligible for deduction.
Another consideration for car insurance and tax deductions is that if you have to pay out of pocket for a property loss of your vehicle that was not completely covered by your business auto insurance, then you may be able to take this as a deduction.
For example, if your business vehicle is stolen or vandalized and your auto insurance policy does not cover the total cost of repair or replacement, the amount you have to pay out of pocket as a result of the claim is considered a loss and may be deducted on your taxes.
Along those same lines, if you have to pay out of pocket for a deductible for a claim for damage to a business vehicle, then the amount of your deductible is technically a loss or an expense that you had to pay out. This amount would be able to be deducted on your taxes.
The last word on deducting the cost of your auto insurance as a business expense is that you will want to use the actual expense method of keeping track of your vehicle expenses.
For your own peace of mind and in the event of an audit by the IRS, it is a good idea to have detailed records of all receipts related to any vehicle expenses that you had to pay during the year.
If you have further questions about tax deductions that could apply to your business vehicle, you should consult with a tax accountant.