When you use a vehicle for business, you can deduct various expenses from your taxes, including auto insurance. However, you may be better off taking a mileage deduction when figuring out the best tax strategy for your business vehicle. Review both options with a tax advisor to make sure you choose the most advantageous way to take the deduction.
Here's what business owners need to know about commercial auto insurance and other vehicle expenses you can write off on your taxes.
Is auto insurance tax deductible?
When you use your auto for business purposes, you can deduct part of the total expense associated with running and maintaining the vehicle, including auto insurance expenses. Whether you can write off every expense depends on whether you use the vehicle for personal and professional purposes or you use it exclusively as a work vehicle.
For example, an Uber or Lyft driver will use their car for personal and business purposes. When they have the app on and are on call or driving a passenger, they are on business hours. The rest of the time, they're using the car for personal purposes. When there's a split like this, the tax deduction will depend on the percentage of commercial usage versus personal usage. So if the Uber driver works only 40% of the time, they can deduct only up to 40% of their costs.
When using the mileage calculation, the driver can track mileage and take a standard mileage deduction only for miles traveled while working. The 2021 standard mileage deduction is 56 cents per mile tracked for business. While you can deduct taxes, insurance costs and other auto expenses, most people opt for the mileage deduction, as it's easier and often yields a better deduction.
What auto insurance costs can you write off?
If you decide to deduct actual expenses rather than mileage, you can deduct your insurance costs and a lot more. If you plan to take actual deductions, make sure to keep receipts from all maintenance and other costs to validate your claims.
According to H&R Block, these are some of the expenses you can deduct:
- Car insurance
- Car repairs
- Depreciation
- Gas and oil
- Garage rent
- Lease payments
- Registration licenses and fees
- Tires
- Tolls
- Parking fees
You'll report expenses on one of two forms, depending on how your business is established. If you're self-employed, you'll add the information to Schedule C. If you have business entities and file Form 1120, you'll use Form 2106 to tally the expenses.
How to write off your car insurance deductible
Your business entity and how you file taxes will determine the form you use to write off your car insurance deductible. Self-employed individuals who file a personal return, Form 1040, will track expenses on Schedule C.
On Schedule C, you'll see a section to list all expenses in Part II. This is where you'll track auto expenses. Line 9 summarizes the car or truck expenses. Line 13 tracks the vehicle's depreciation, and Line 15 is devoted to all business insurance expenses other than health insurance. These line items, along with all the other expenses in your business, will be tallied on Line 28.
IRS Form 2106 is similar to a Schedule C in that it tracks business employees' expenses. You'll start with Section C for the actual expenses. Unlike Schedule C, Form 2106 doesn't separate insurance as a line item. You'll include your insurance with other vehicle expenses on Line 23. Depreciation is handled in Section D for vehicles.
What is commercial auto insurance, and should you consider it?
Commercial auto insurance is an insurance policy designed specifically to handle the risks of commercial vehicles. Some personal auto insurance policies will allow policyholders to denote that their personal vehicle is also used for business pursuits. This applies when vehicles are used for both personal and business purposes – think of a realtor taking clients around in their car.
The commercial auto insurance policy is for vehicles exclusively owned and operated by a business. Business owners should talk to their insurance agent about their vehicle usage to determine if a commercial auto insurance policy is necessary. Commercial auto insurance policies are often more expensive policies to handle the risk of business pursuits.
As in the realtor example, those who sometimes use a personal vehicle for work will obtain a personal auto insurance policy designated for business pursuits. But when a vehicle, such as a delivery van or an electrician's truck, is used solely for business purposes, a commercial insurance policy is required.
When should you choose ordinary expenses over mileage deductions?
Ordinary insurance expenses, such as commercial auto insurance, are valuable deductions to take on tax returns. However, they're not always the best option. Run the numbers to see how much you can deduct with your ordinary expenses total versus the total standard mileage deduction. If the standard mileage deduction is more, this is the better avenue to take. The only record you need to have with the standard mileage deduction is a mileage log.
The mileage log tracks the miles for each trip. It states where you went and for what reason. This is especially important for vehicles that have both personal and commercial use. If you are audited, the IRS representative will want to see the log of the miles used for business purposes.
Can you write off the deductible for commercial car insurance?
When you have a vehicle that you can validly deduct on tax returns, you can also write off any deductibles paid during the tax year. This means that if you had an accident, filed a claim and paid a $500 deductible, you could include that $500 with other repairs made to the car. It's an out-of-pocket expense and thus deductible. If your car is only partially used for business purposes, the deductible would be written off only for the percentage of time that you use the car for business.