Buying a New Car Qualifies for a Tax Deduction

Purchasing a new vehicle can be a significant business investment, and understanding the related tax deductions can lead to substantial savings. For self-employed individuals and business owners, the cost of a new car used for work purposes can be deducted from their taxable income, directly lowering their tax liability. This tax strategy is available to a range of business structures, from freelancers and independent contractors to larger incorporated businesses.

Business Use Qualification Requirements

The ability to claim a tax deduction for a new vehicle hinges on the “more than 50% business use test.” The Internal Revenue Service (IRS) requires the vehicle be used more than 50% of the time for qualified business purposes in the year it is first placed in service.

Qualified business use includes activities like driving to meet clients, traveling between job sites, and making trips to the bank for business needs. Commuting from your home to your primary place of business is not considered business use. For example, a consultant driving from home to a client’s office is business use, while driving from home to their own permanent office is personal commuting.

Failing to maintain this level of business use in subsequent years can have negative tax consequences. If business use falls to 50% or below, the IRS may require you to “recapture” some of the depreciation you claimed in prior years. This means you would have to add a portion of the previous deductions back into your income.

Vehicle-Specific Deduction Rules

The tax rules for deducting a new vehicle’s cost diverge based on the vehicle’s weight. The Gross Vehicle Weight Rating (GVWR), which is the maximum operating weight of a vehicle as specified by the manufacturer, is the determining factor. This separates vehicles into two main categories for tax purposes: heavy vehicles and passenger automobiles.

Vehicles Over 6,000 Pounds

Vehicles with a GVWR over 6,000 pounds are not subject to the annual luxury auto depreciation limits, allowing for more generous first-year deductions. The Section 179 deduction allows a business to treat the cost of qualifying property as an immediate expense rather than capitalizing it over time. The maximum Section 179 deduction for heavy SUVs is $31,300, while for certain other heavy vehicles like cargo vans or heavy-duty pickup trucks, a business may be able to expense the entire purchase price up to the overall Section 179 limit of $1,250,000.

In addition to Section 179, these heavy vehicles are also eligible for bonus depreciation. For 2025, bonus depreciation allows for an additional first-year deduction of 40% of the remaining cost after any Section 179 deduction is taken. A business can use both deductions, first applying the Section 179 expense and then taking bonus depreciation on the leftover basis.

Passenger Automobiles

New vehicles with a GVWR of 6,000 pounds or less fall under more restrictive rules known as the “luxury auto depreciation limits.” This label is applied by the IRS regardless of whether the car is a luxury model; it applies to any passenger automobile that meets the weight criteria. These limits cap the amount of depreciation that can be claimed each year.

For new passenger automobiles placed in service in 2025, the first-year depreciation limit, which includes any potential bonus depreciation, is capped at $20,200. The limits for subsequent years are also capped at specific dollar amounts: the second year is $19,600, the third year is $11,800, and each succeeding year is $7,060 until the cost is fully recovered.

Choosing Your Deduction Method

After confirming your vehicle qualifies for a deduction, you must select a method for calculating the expense. The IRS provides two distinct options: the actual expense method and the standard mileage rate. The choice between these methods impacts both the size of your potential deduction and the level of record-keeping required.

The actual expense method involves tracking and summing up all the costs associated with operating the vehicle for business purposes. This includes expenses like gasoline, oil changes, tires, repairs, insurance, and registration fees. A component of the actual expense method is depreciation, which allows you to recover the cost of the vehicle, and the Section 179 and bonus depreciation deductions are claimed this way.

A simpler alternative is the standard mileage rate. This method allows you to deduct a flat amount for each mile driven for business, which for 2025 is 70 cents per mile. While you cannot deduct individual operating costs under this method, you can still separately deduct other expenses, such as parking fees, tolls, and the business portion of interest paid on a car loan.

The actual expense method, particularly with a new car eligible for bonus depreciation, often results in a much larger deduction in the first year but demands meticulous tracking of every expense. The standard mileage rate is simpler to administer but may yield a smaller deduction. A rule to remember is that if you choose the actual expense method and use an accelerated form of depreciation in the first year, you are generally prohibited from switching to the standard mileage rate for that same vehicle in any future year.

Information and Records for Claiming the Deduction

Properly claiming a vehicle deduction requires diligent preparation and gathering of specific information to meet IRS substantiation requirements. Having organized records is fundamental to supporting your claim in the event of an audit.

You will need to have several key pieces of information about the vehicle itself. This includes the vehicle’s total cost basis, which is the purchase price plus any sales tax and initial fees. You must also record the exact date the vehicle was “placed in service,” meaning the date it was ready for business use, and track your total mileage, business mileage, and commuting mileage for the year.

To substantiate these figures, the bill of sale from the dealership is the primary document for establishing the vehicle’s cost and purchase date. The most important record is a contemporaneous mileage log. To be considered adequate by the IRS, this log should be kept regularly and must include the date of each business trip, the destination, the specific business purpose of the travel, and the total miles driven.

This collected information is used to complete and file Form 4562, Depreciation and Amortization. Key data points like the vehicle’s cost, the date placed in service, and the total business mileage are entered directly onto this form.

How to Claim the Deduction

Once you have compiled all the necessary records, the final step is to formally claim the deduction on your tax return. The process involves reporting the calculated vehicle expense on the correct forms.

The completed Form 4562, showing the calculation for your deduction, must be filed with your annual tax return. This form is an attachment that supports the deduction figure you claim elsewhere. The specific placement of the deduction depends on your business structure.

For a sole proprietor or single-member LLC, the total vehicle deduction calculated on Form 4562 is transferred to Schedule C (Form 1040), Profit or Loss from Business. For partnerships and S corporations, the deduction is taken on the business’s informational return (Form 1065 or 1120-S), and for C corporations, it is claimed on the corporate tax return (Form 1120).