When Is Car Insurance Tax Deductible
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Wondering if you can deduct your car insurance from your taxes? Well look no further because we have you covered.
According to the IRS, you may deduct all or a portion of your car insurance on your taxes if you use your vehicle while conducting business.
How to Deduct Your Car Insurance
If you qualify, there are two methods you can use to deduct your car insurance on your taxes, the standard mileage method or the actual expenses rate method. To use the standard mileage rate method (calculated at $0.585 per mile in 2022), you must use it within the first year you use your car for business purposes. After the first year, you have the choice to continue with the standard mileage rate method, or you can switch to the actual expenses method.
To use the Actual Expenses Method, you need to record the actual costs to operate your car based on the percentage of time you used the vehicle for business.
For example, if you drove your vehicle exclusively while conducting business, 100% of those costs are expensable. However, if you used the car for business 20% of the time, only 20% of the actual costs to operate your vehicle would qualify for a deduction.
A list of expenses that you can deduct for your car includes:
- Car insurance premiums
- Car repairs
- Lease payments
- Parking fees
Who Should Own the Vehicle – the Business or the Business Owner?
Deciding whether to use your personal vehicle for business purposes or if your business should purchase a vehicle is a personal choice and would depend on your business structure. Each business entity and classification is required to follow specific guidelines. Understanding these guidelines should help you make the best decision.
If you’re self-employed you’re considered sole proprietor and qualify to use the actual expense method or the standard mileage rate method as outlined above. This also goes for single-member LLCs that have not taken the S-corp election.
S Corporation/C Corporation
If you are a shareholder employee of an S Corporation or a C Corporation, and use your personal vehicle on behalf of the corporation, you can receive reimbursement from the corporation. In this instance, your business will receive a deduction for the car expenses and the reimbursement is not considered taxable income to the employee.
All vehicle operating expenses can be deducted by the corporation based on the business-use percentage. If you use the company car for personal reasons, it is deemed an employee benefit and treated as income.
As with an S Corporation, a partner or member may be able to claim the deduction for unreimbursed car insurance and other car related costs as a part of the partnership or LLC agreement.
No matter how you set up ownership for your vehicle, you want to ensure you have the best auto insurance policy in place. That starts with comparing rates so you know you’re getting a good deal for the coverage you need.
Do Employees Qualify for a Car Insurance Tax Deduction?
Although the car insurance tax deduction is primarily for self-employed people who use their car for business, they aren’t the only ones who qualify for this deduction. There are a few instances where you can deduct your auto insurance even if you’re not self-employed.
Here’s a short list of those who may qualify:
- Military reservists are required to travel more than 100 miles from home
- Certain performing artists
- Fee-based state or local government officials
Can Ridesharing Drivers Deduct Car Insurance?
Yes. Rideshare drivers like Uber or Lyft are considered business owners or partners and qualify for the car insurance tax deduction. Like other self-employed business owners, they can only deduct the portion of the insurance they used for business purposes.
Because the use of their car is their business, their “business miles” include driving to a request, the miles driven to drop off passengers while waiting for another ride, and the miles driven before a cancellation.
Keeping meticulous records of personal and business-related miles is crucial. The IRS requires you keep records that support your deduction for at least three years from when you filed your tax return. Your records should include the miles you’ve driven, where you traveled, and what business you conducted.
Here are 2 common mileage tracking methods.
Keeping a record of your odometer readings is the IRS’ preferred method to record your business miles.
- Use a spreadsheet, notebook, or logbook to record your odometer readings.
- Find the difference between your odometer at the beginning and the end of your trip to determine the miles you drove that day.
Mileage Tracking Apps
You can use an app on your smartphone to track your mileage as well. This is an easy way to keep a record of your driving.
Mileage tracking apps like Stride, MileIQ, and Everlance automatically track your car’s motion from one location to another. While not 100% accurate, you might find it more time effective than tracking miles manually and it might be easier to remember to do it consistently.
Car Insurance Tax Deductions for Airbnb Owners
If you operate an Airbnb, VRBO, HomeAway, or rent your property, you might be able to claim this deduction. Certain instances such as if you drive your car to check in guests, open the house and lock up, perform maintenance, clean the property, pick up supplies or equipment, those are tax deductible trips where you can write off a portion of your premium.
Also, beyond your auto insurance premium, whenever you’re required to travel overnight for business related to your rental property, you can deduct expenses associated with that trip. These expenses include hotel accommodations, airfare, meals, entertainment, rental car, tolls, tickets, and more.
Travel for educational purposes related to your business may also be deducted, including attending classes, conventions, trade shows, or meetings with business associates or investors.
Vehicle Loss or Theft May Be Tax Deductible
The IRS allows a deduction on your tax return due to the loss of your vehicle resulting from casualty. A casualty is deemed damage, destruction, or loss due to sudden, unusual, or unexpected occurrences. No-fault incidents such as fires, weather-related damage, and vandalism are also classified as casualties.
Whether you use your car for personal, business, or both, you may be entitled to a deduction on your tax return. If your vehicle is considered a “total loss” (your car isn’t repairable, or the costs to repair it exceeds the actual cash value of the vehicle), or was stolen, here’s are the steps you need to take to declare that loss:
- File a claim with your car insurance provider
- The cause for the loss or theft cannot be due to your negligence.
- If the damages to your car exceed the policy limits, you can deduct the difference.
How to Deduct Your Car Insurance on Your Tax Forms
When you file your taxes, some or all of your expenses related to the business use of your car may be deductible. The type of business entity you have will determine which forms you must file when claiming these expenses. Those deemed self-employed, like Uber and Lyft drivers, are required to report the business costs of their car insurance expenses on a particular form. The form is on the IRS website, and it’s called the Schedule C form.
Suppose you are an employee required to use your vehicle while performing your duties for your employer, such as a traveling nurse. In that case, you can use Form 2106 to report your employee’s business expenses.
Before claiming any deductions, it is best to consult with a tax professional. They can help you navigate the IRS guideline to ensure you qualify for the car insurance expenses you want to claim. A pro may also be able to identify the costs that you didn’t know you could take. Either way, investing in a tax professional to make sure you’re filing legitimate expenses can save lots of time and money.
Finding the Right Business Car Insurance
Identifying the best car insurance for your business vehicle will take a bit of research. Like personal vehicle insurance, there are lots of options to choose from.
Can I Use My Personal Insurance for My Business Vehicle
No. Most states require commercial auto insurance for business-owned vehicles. This coverage includes any vehicle owned by the company including cars, trucks. vans, dump trucks, etc. If your state doesn’t require commercial auto insurance,, it’s still a good idea to have it.
Commercial Auto Insurance Coverage
Getting commercial auto insurance can save you a heap of time and money if you’re involved in an accident, or experience damage to your vehicle or property. It also covers legal fees if you’re sued. If your commercial policy also includes comprehensive insurance, it may cover damages from an earthquake, fire, vandalism, theft and more.
Medical payment coverage is an extra layer of protection option to protect you while driving a commercial vehicle. This coverage may reimburse or pay your medical expenses if you’re injured in an accident, regardless of who is at fault.
Does Commercial Car Insurance Cover My Personal Vehicle
No. Commercial car insurance does not provide coverage for personal or leased vehicles. However, if you get in an accident or are injured while in a personal or leased vehicle while conducting business, you may be covered under a hired and non-owned auto insurance policy.
A hired and non-owned policy covers commercial auto liability damages, including settlements or judgments, court costs, legal fees, and other related costs as a result of an accident in which the employee is at-fault.
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