How to write off auto insurance
When you use a vehicle for business, you can deduct various expenses from your taxes, including auto insurance. However, you might be better off deducting mileage when determining the best tax strategy for your business vehicle. Review the two options with a tax advisor to make sure you choose the most beneficial way to take advantage of the deduction.
Here’s what business owners need to know about commercial auto insurance and other vehicle-related expenses you can deduct from your taxes.
Is auto insurance tax deductible?
When you use your automobile for business purposes, you can deduct a portion of the total expenses associated with operating and maintaining the vehicle, including automobile insurance expenses. That you can write off all expenses depend on whether or not the vehicle is used for personal purposes and for 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 during working hours. The rest of the time, they use the car for personal use. When there is an allocation like this, the tax deduction will depend on the percentage of commercial use versus personal use. Thus, if the Uber driver only works 40% of the time, he can only deduct up to 40% of his expenses.
When using mileage calculation, the driver can track mileage and make standard mileage deduction only for kilometers driven while working. The Standard kilometer deduction 2021 is 56 cents per mile tracked for businesses. While you can deduct taxes, insurance fees, and other auto expenses, most people opt for the mileage deduction because it is easier and often gives a better deduction.
What auto insurance costs can you deduct?
If you choose to deduct actual expenses rather than mileage, you can deduct your insurance costs and more. If you plan to make actual deductions, be sure to keep receipts for all maintenance and other charges to validate your claims.
According to H&R Block, here are some of the expenses you can deduct:
- Car insurance
- Car repairs
- Gas and oil
- Garage rental
- Rental payments
- Licenses and registration fees
- Parking fees
You will report the expenses on one of two forms, depending on how your business is established. If you are self-employed, you will add the information to Annex C. If you have business entities and complete Form 1120, you will use Form 2106 to record expenses.
How to write off your auto insurance deductible
Your business entity and how you file your taxes will determine which form you use to write off your auto insurance deductible. Self-employed workers who file a personal return, Form 1040, will track expenses on Schedule C.
On Schedule C you will see a section to list all the expenses in Part II. This is where you will track auto expenses. Line 9 summarizes the car or truck expenses. Line 13 follows the depreciation of the vehicle and line 15 is devoted to all professional insurance expenses other than health insurance. These items, as well as all other expenses of your business, will be recorded on line 28.
IRS Form 2106 is similar to a Schedule C in that it tracks the expenses of company employees. You will start with section C for actual expenses. Unlike Schedule C, Form 2106 does not separate insurance as an item. You will include your insurance with other vehicle expenses on line 23. Depreciation is discussed 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 manage the risks of commercial vehicles. Some personal automobile insurance policies will allow policyholders to indicate that their personal vehicle is also used for business purposes. This applies when the vehicles are used for personal and business purposes – think of a real estate agent who takes clients in their cars.
The commercial automobile insurance policy applies to vehicles owned and operated exclusively by a business. Business owners should speak with their insurance agent about the use of their vehicle to determine if a commercial auto insurance policy is necessary. Commercial auto insurance policies are often more expensive policies for managing the risk of doing business.
As in the real estate agent example, those who sometimes use a personal vehicle for work will get a designated personal auto insurance policy for business activities. But when a vehicle, such as a delivery van or electrician’s truck, is used only for business purposes, a business insurance policy is required.
When to choose ordinary expenses over mileage deductions?
Regular insurance expenses, such as commercial auto insurance, are valuable deductions to take on tax returns. However, they are not always the best option. Run the numbers to see how much you can deduct with your total regular expenses versus the total standard mileage deduction. If the standard kilometer deduction is higher, this is the best 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 indicates where you went and for what reason. This is particularly important for vehicles for personal and commercial use. If you are audited, the IRS representative will want to see the log of miles used for business purposes.
Can you write off the deductible for commercial auto insurance?
When you own a vehicle that you can validly deduct on tax returns, you can also cancel any deductibles paid during the tax year. This means that if you were in an accident, filed a claim, and paid a $ 500 deductible, you could include that $ 500 with other repairs made to the car. This is a personal expense and therefore deductible. If your car is only partially used for business purposes, the excess will only be deducted for the percentage of time you use the car for business purposes.