Are Vehicles Tax Deductible for Your Business?

Using a vehicle for business purposes can significantly reduce a taxpayer’s taxable income. The Internal Revenue Service (IRS) allows for the deduction of associated expenses. Deductions require careful attention to specific guidelines.

Who Can Deduct Vehicle Expenses

Vehicle expense deductions are available to businesses and self-employed individuals (e.g., sole proprietors, partners, LLCs, S-corporations, C-corporations). Vehicles must be used directly for business activities like client visits, delivering goods, or travel between business locations. Ordinary commuting from home to a regular workplace is not a deductible business expense.

Unreimbursed employee business expenses are generally no longer deductible. Most employees cannot deduct vehicle expenses, even when using a personal vehicle for work. Limited exceptions exist for certain qualified performing artists, fee-basis state or local government officials, and individuals with impairments who have specific unreimbursed business expenses.

Methods for Claiming Vehicle Deductions

Taxpayers have two primary methods for calculating vehicle deductions: the standard mileage rate and the actual expenses method.

The standard mileage rate simplifies vehicle expense deductions. The IRS sets a fixed rate per business mile driven annually, covering costs like depreciation, fuel, oil, maintenance, repairs, tires, insurance, and registration. For the 2024 tax year, the standard mileage rate for business use is 67 cents per mile. This method requires only a precise record of business mileage.

The actual expenses method allows deduction of specific vehicle operating costs. These include gasoline, oil, repairs, maintenance, tires, insurance, and registration fees. A portion of vehicle loan interest may also be deductible. Lease payments are deductible under this method, subject to specific rules.

Actual expenses must be prorated based on the vehicle’s business versus personal use. For example, if a vehicle is used 70% for business, only 70% of the total actual expenses can be deducted. This method may result in a larger deduction, especially for newer or more expensive vehicles with higher operating costs or significant depreciation.

Depreciation and Other Specific Vehicle Deductions

Purchased business vehicles can be depreciated over their useful life. MACRS is the most common depreciation method for business vehicles, typically assigning a five-year recovery period for cars and light trucks.

Businesses can also accelerate depreciation using Section 179 and bonus depreciation. Section 179 allows businesses to deduct the full purchase price of qualifying vehicles up to a specified limit in the year they are placed in service. For 2024, the maximum Section 179 deduction is $1,220,000, with a phase-out threshold of $3,050,000. Bonus depreciation allows businesses to deduct a large percentage of the cost of eligible vehicles in the year they are placed in service; for 2024, this is 60%. Both are subject to luxury vehicle limits, capping the depreciation that can be claimed on passenger automobiles. For example, for a car placed in service in 2024, the maximum first-year depreciation deduction, including any Section 179 or bonus depreciation, is $20,400.

For leased vehicles, the business portion of lease payments is generally deductible. However, for higher-value leased vehicles, an “inclusion amount” may reduce the deductible lease payment. This inclusion amount prevents excessive deductions for luxury leased vehicles compared to purchased ones. The inclusion amount is based on the fair market value of the vehicle and is published by the IRS annually.

Record-Keeping for Vehicle Deductions

Accurate record-keeping is essential for vehicle expense deductions. Without proper documentation, deductions may be disallowed during an audit, leading to additional tax liabilities and penalties. Taxpayers bear the burden of proof.

A detailed mileage log is required for any business vehicle. The log should include trip dates, destinations, business purposes, and odometer readings at the start and end of each business trip. Total annual mileage, including business, commuting, and personal miles, must also be recorded to calculate the business-use percentage.

For actual expenses, keeping all vehicle-related receipts is essential. This includes receipts for fuel, oil changes, maintenance, repairs, tires, insurance, and registration fees. Vehicle records like purchase date, cost, make, model, and VIN should also be retained.

Mileage tracking applications, physical logbooks, or spreadsheets can facilitate record-keeping. Consistency and accuracy are crucial. Taxpayers should retain these records for a minimum of three years from the date the tax return was filed or the due date of the return, whichever is later.