Owning a business or working as a freelancer or independent contractor can be a terrific experience. You don’t report to a boss, for the most part, but you do have the added responsibility of covering any costs a business usually would if you were a company employee. Luckily, you can claim some of these expenses, such as car insurance, as a deduction on your tax return, which can save you a lot of money.
In this article, Part 1 discusses the two ways in which you can deduct your car insurance on your taxes. Part 2 explores the situations in which you can claim car insurance as a tax deduction.
Part 1 of 2: How to calculate auto expense deductions
When claiming auto expenses as a deduction, you have two ways of doing so. In fact, the Internal Revenue Service (IRS) recommends tax payers figure their deduction both ways and take the deduction that gives them the biggest benefit.
The two ways of claiming a deduction include:
Standard deduction: Claiming a standard deduction represents the first, and probably easiest, way to claim a car insurance deduction on your taxes. While easier, this deduction only takes into account the mileage driven, multiplying the number of business miles by a certain rate. It does not allow you to claim any part of your car insurance as a deduction.
Detailed deduction: Taking a detailed deduction allows you to deduct other expenses associated with your car, including insurance premiums. With this method, you would take the amount of business miles driven as a percentage of total use of your car for the year and apply that percentage to expenses, such as insurance premiums.
So, if you spent 60% of your miles in your car going from customer to customer, then you could claim 60% of your car insurance premiums as a tax deduction. Commuting to and from work do not count in this calculation, and neither do any expenses paid for tolls and parking while commuting.
Part 2 of 2: When is your car insurance tax deductible?
Determining if you qualify is the first step in claiming your car insurance as a tax deduction. The section below covers the different types of scenarios in more detail.
As a business owner: As an owner of your own business, you can claim certain expenses related to your business on your taxes as a deduction. If you use your car for company business or travel, the expenses from this count as a deduction, with the percentage of miles used for business travel determining the percent of your car insurance that you can claim. The only stipulation in this scenario is that the first and last trip of the day are considered commuting, and thus are not included in your business miles calculation.
As a contractor or freelancer: Like business owners, contractors and freelancers can also claim the percentage of miles they devote to business as a tax deduction. So, if you drive 12,000 miles a year and 6,000 miles are business related, then you can claim 50% of your car insurance premiums as a tax deduction.
As a W2 or salaried employee: Even if you work full-time for a company, you might qualify for a deduction if you use your personal vehicle to do tasks associated with your work.
You can only do so if your employer does not reimburse you for the miles you drive in association with your job. So, if 20% of your driving per year is associated with work and your company does not reimburse you for this, you can claim 20% of your car insurance premiums as a tax deduction.
Remember, though, you cannot count your commute to and from your workplace as a part of this deduction.
While owning your own business, working from home, and working away from the office can give you a sense of freedom, it does comes with its own downside in the form of extra expenses associated with your car. Fortunately, you can claim some or all of your car insurance premiums as a tax deduction if you use your car to do business. When claiming a deduction, make sure to use the deduction that benefits you the most as described above.