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Do You Need Commercial Insurance to Deduct Car Expenses?


Content provided for general information. Talk to your advisor to learn about recent updates or other rules that may apply to your situation.

Commercial auto insurance isn’t a requirement to deduct car expenses, but it’s still a good idea. Here’s why.

What are the requirements to deduct car expenses?

Independent contractors and small business owners can deduct car expenses related to business trips. It can either be a vehicle you exclusively use for business or one that you also use for personal reasons.

If you also use your car for personal reasons, your deductions are limited to your business use of your car.

The IRS has no requirements to register your car as a business vehicle or to carry commercial auto insurance.

What does commercial auto insurance do?

Commercial auto insurance is just like personal auto insurance except it protects you while you’re working.

One thing that many gig workers and small business owners miss is that your personal car insurance won’t cover claims while you’re working. (And insurance companies have ways of finding out if you were working at the time of an accident if you’re planning on telling them you weren’t.)

Even if you have insurance coverage through a gig app like Uber, you still probably need your own commercial auto insurance policy. This can either be a separate policy or an option you add through your personal car insurance policy.

Gig app insurance policies often leave gaps in coverage. For example, you might only have coverage when you have a passenger in your car. But your personal car insurance company might say your time in between passengers is still work time that your personal policy doesn’t cover.

So if you’re self-employed and will be using your own car, talk to your insurance agent before you start working.

You can deduct commercial auto insurance.

If you do buy commercial auto insurance, you can generally deduct the cost of your coverage as a business expense. And unlike other car expenses, you don’t have to prorate it by your business versus personal miles since it’s 100% a business expense.

For example, say your personal car insurance is $2,000 per year and 75% of the miles you drive are business miles. You can deduct 75% of your personal car insurance cost or $1,500.

Now let’s say you decide to add on the gig economy option for an extra $250 per year. (I’m just making numbers up; it will probably cost more.)

You can deduct the full $250 as long as your car insurance company shows it as a separate itemized line item. That’s because you only have to pay the $250 to cover your business driving.

So your total tax deduction for car insurance would work out to $1,500 + $250 = $1,750.

But don’t forget if you use the standard mileage deduction instead of your actual expenses, the standard mileage deduction covers your insurance. You don’t get to claim both mileage and car insurance.