Business Auto Insurance and Tax Deductions
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One of the many advantages of being self-employed is you can write off many charges on your taxes. While most people know that they can deduct work-related travel expenses, many people are confused about business auto insurance and tax deductions. Let us dig into this topic and get answers that can help you save more of your hard-earned money from “Uncle Sam’s” reach.
Suppose you are an independent contractor, small business owner, can be classified as self-employed, or use your automobile for commercial activity, which extends from more than just your regular commute. In that case, you can most likely qualify to deduct your vehicle insurance premiums on your taxes. However, if your automobile has a dual purpose of both personal and biz related, you can only deduct from your taxes the amount your car uses for business activity. This is why it is wise to afford it to have a vehicle that is solely used for your business endeavors, which will simplify your tax preparation. Most people, though, especially those that are starting out, must get by with a car with multiple uses.
If you are not an employee who gets compensated, you must send an annual 1099 form over to the Internal Revenue Service or IRS. This form will put you in a category as a self-employed person and will allow you to deduct the cost of insuring your vehicle while in the act of conducting business on your taxes. Let us focus on the three guidelines that enable you to claim a deduction lawfully, so you can stay in good graces with the IRS and put more money in your pocket.
Let’s say you have a window cleaning business and use a truck to 65% of the vehicle’s mileage towards related biz activity. The remaining 35% of car use is for personal use only. Therefore, you would legally be able to deduct 65% of the insurance costs. So if you paid $2,000 annually to insure it, $1,300 of the premiums’ expense could be written off. Although many small company owners stretch the actual percentage use of their vehicle, be honest because you never know when an audit can come.
Let’s say you are a freelance journalist and put 20,000 miles annually on your automobile, 10,000 of which you use traveling to assignments. For this case, 50% of your car insurance premiums would be eligible for a tax deduction.
Let’s say for illustration purposes that you receive a salary from a company but are required to use your vehicle for job-related uses. If you ended up using your car for 25% of work-related miles, then you would be allowed to get a tax deduction accordingly of 25% of your insurance costs for that year.
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You have a choice whether to deduct your mileage by two different models. The first is the standard deduction that is per mile. This rate can change, but last year it was $.56 for each mile driven. This means of calculating is easier for many because they just add up the miles and apply the rate and don’t need to configure all the related costs of vehicle maintenance, licenses, gasoline, depreciation, etc.
The other method will require you to itemize each expense related to your car and business activity that is more complicated and time-consuming. If you have an expensive car that is costly to maintain, it might exceed the average allowance of $.56 per mile, and thus the itemized option might allow you to deduct a higher amount. Whatever scheme you choose, just make sure to keep detailed expense records each year.
Remember that you cannot deduct the first trip away from your residence and the last trip back home if you work from home. This sounds a bit weird, but that is how the IRS currently functions, with many strange rules. Furthermore, you cannot use a medical deduction for the premium portion you pay into your policy towards medical expenses. Get a quick business car insurance quote now with Good to Go Insurance company. Check our online insurance discounts today and save.