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UPDATED: Mar 13, 2020
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While it is prudent to try to take as many tax deductions as you can qualify for, you are likely unable to deduct expenses for your vehicle if you are only using it for personal reasons. However, there is a possibility that you could take a tax deduction for insurance premiums and other vehicle expenses if you use your vehicle for business. If this is the case, you may want to speak with a CPA or tax specialist to find out how you should be maintaining your business records to take advantage of this tax deduction.
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Potential Tax Deductions for Car Insurance Premiums
If you own your own business and use your vehicle for business errands, then you should be documenting the miles and expenses for your vehicle in order to take a tax deduction. There are generally two methods used for calculating deductions for vehicle expenses for business purposes.
The first method for calculating tax deductions for the use of your vehicle for business purposes is the standard mileage rate method. If you choose to use this method to calculate vehicle expenses, then you are able to multiply the standard mileage rate by the number of miles that you drove your car for business purposes.
The IRS updates the standard mileage rate each year, so you should check online to find the most current rate. In addition, there are certain scenarios in which the standard mileage rate cannot be used for the purpose of calculating a tax deduction.
The alternative method is the actual expenses method. To use this method, you must keep an accurate record of each of the expenses incurred for the use of your vehicle for business purposes. In the actual expenses method, you can deduct expenses related to depreciation, lease payments, registration fees, licenses, gas, insurance, repairs, oil, parking fees, tolls and tires.
The most important thing to remember about using the actual expenses method for the deduction of vehicle expenses is that you must have accurate records to substantiate your deductions. Consider consulting with an experienced accounting to determine which method of deduction is the best choice for your business.
Tax Deductions for an Unreimbursed Loss
If your car was stolen or vandalized, you may be able to take a deduction for this loss on your taxes if you did not receive an insurance settlement for this loss. The key thing to remember is that if you received a settlement from the insurance company as compensation for your loss, then it is not reimbursed and cannot be taken as a tax deduction.
In the case of your vehicle, the insurance coverage most likely to applicable to this type of claim is comprehensive auto insurance. This type of optional insurance coverage is fairly standard among vehicle owners. It covers you up to your policy limits for damage to your car as a result of an incident that is not a collision. For example, theft, vandalism, flooding or a falling object would all be covered under a comprehensive insurance policy.
If you have a comprehensive insurance policy, it is likely that you have some amount of a deductible for this coverage. Even if you receive compensation from the insurance company for the damage or theft of your vehicle, you may be able to deduct the deductible that you have to pay out of pocket from your taxes. This is because the deductible is considered an unreimbursed loss.
If you are looking for ways to save money when shopping around for auto insurance quotes, consider the role that the deductible plays in determining your auto insurance premiums. The general rule of thumb is that a higher deductible means a lower insurance premium. Deductibles may be available in certain interval amounts.
If you think that you are able to pay a little more out of pocket in the event that you have to file a claim under your comprehensive policy, then choosing a higher deductible might be a good way for you to lower your premiums. You should make sure to ask your auto insurance agent what effect a higher deductible can have on your specific rate when you are comparing different auto insurance options.
Driving Your Personal Car for Business Purposes
Understanding the insurance aspects of using your personal car for business reasons goes hand in hand with preparing for a tax deduction. It is important to keep in mind that your personal auto insurance policy may not provide coverage for you if you are driving your car for business purposes. This does not include driving your car to and from work or running personal errands for yourself during the workday.
If you drive your car to and from events for work or use it to pick up supplies and inventory, these types of uses may not be covered under your personal auto insurance policy. If you frequently use your vehicle for these types of business activities, then you should consider adding a business insurance policy to your coverage.
If you are driving your vehicle for a business purpose and end up causing an accident that results in injury to other people or their property, you may be facing a lawsuit for the damages. In addition, if you have other employees that drive your vehicles for business purposes, your insurance company may require you to get a separate business insurance policy for commercial purposes.
Another option for a business owner who only occasionally uses their vehicle for business purposes is to inform their insurance company that the vehicle will be used on very rare occasions for limited business purposes.
If this is the case, the insurance company will allow you to simply maintain your existing personal auto insurance coverage and may increase your premium by a small amount to cover the increased risk.
If you have questions about which types of activities are covered under your personal auto insurance policy, you should speak with your insurance agent directly and consult the terms of your auto insurance policy. Along those lines, when you are shopping around for different auto insurance quotes, be sure to ask about whether you would need a separate policy or coverage for the use of your vehicle for business purposes.
When you are calculating tax deductions for your use of your vehicle for work errands, remember that if you were reimbursed by your employer for your use of the vehicle or mileage, then you cannot also claim this as a tax deduction. It’s sort of like double dipping.
If you have to drive your car for a work reason, document the date, purpose, mileage and reimbursement status of your travel. If this is the type of occasional use you expect with your vehicle, then it probably makes more sense for you to use a standard mileage deduction rather than an actual expense method of calculating your vehicle expense tax deduction.
However you choose to insure a vehicle that you use for business purposes, it is important to keep track of its use for business and personal reasons if you hope to take a tax deduction for vehicle expenses. If you find yourself occasionally driving company vehicles through your work, you may want to check with your employer to find out what the company policy is on insurance for your use of those vehicles.
General Recap on Tax Deductions for Car Insurance Premiums
If you are looking to take a tax deduction for your car insurance premium, this will only apply if you use your vehicle for business purposes.
If you sometimes use that same vehicle for personal reasons, then you need to have good records in order about the various uses of your vehicle so that your applicable expenses are properly documented. If you are able to take a tax deduction for vehicle expenses because of using your vehicle for business reasons, then you will be able to account for your insurance premiums through the actual expenses method of calculating expenses.
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