Can a Sole Proprietor Write Off a Vehicle?
Sole proprietors can lower their taxable income by deducting vehicle costs. This overview explains the principles for calculating and substantiating this deduction.
As a sole proprietor, using a personal vehicle for business activities is common, and the associated costs represent a significant opportunity for tax savings. The Internal Revenue Service (IRS) permits the deduction of these vehicle expenses, which can lower your overall taxable income. This deduction is available to self-employed individuals and business owners who use their vehicles for work-related purposes.
Determining Business Use of Your Vehicle
Only the costs associated with the business use of your vehicle are deductible. To establish this, you must calculate your business-use percentage by dividing the total miles driven for business by the total miles driven for the entire year. This percentage is then applied to your total vehicle expenses to find the deductible amount.
Trips to meet with clients, travel to a supplier, or driving between different job sites or offices all qualify as business mileage. For example, if your primary office is at home, driving from your home office to a client’s location is considered a business trip. These miles are directly related to the income-generating activities of your enterprise.
The most common non-deductible travel is commuting. The miles you drive from your home to your primary place of business are considered personal commuting miles and cannot be deducted. This rule applies even if you engage in work-related phone calls or listen to business-related audio during the drive.
Methods for Calculating the Vehicle Deduction
The IRS provides two methods for calculating the vehicle deduction: the standard mileage rate and the actual expense method. You may want to calculate your deduction using both methods to see which one yields a greater tax benefit. Your choice of method may be restricted based on how you have treated the vehicle in previous tax years.
The standard mileage rate is a simplified approach that allows you to deduct a set amount for each business mile driven. For 2025, this rate is 70 cents per mile. This rate is designed to cover the variable costs of operating a vehicle, like gasoline, and fixed costs like depreciation and insurance. When using this method, you can still separately deduct business-related parking fees and tolls.
With the actual expense method, you track and sum up all the costs of operating your vehicle for the year. These costs include:
- Fuel
- Oil changes
- Repairs
- Tires
- Insurance
- Registration fees
- Lease payments if you lease the vehicle
After totaling these expenses, you multiply the sum by your business-use percentage to arrive at your deduction.
A component of the actual expense method is depreciation, which allows you to recover the cost of the vehicle over time. You may be able to accelerate this deduction using provisions like the Section 179 deduction, which allows you to expense a portion of the vehicle’s cost in the year it is placed in service. To qualify for Section 179, the vehicle must be used more than 50% for business. There are also bonus depreciation rules that can increase your first-year deduction, though these are being phased out.
Information and Records You Must Keep
Regardless of the deduction method you choose, the IRS mandates that you maintain thorough records to support your claim. For the standard mileage rate, this means keeping a detailed log of your business mileage. This log should be updated regularly and must include the date, your destination, the business purpose of the trip, and the starting and ending odometer readings.
If you opt for the actual expense method, your recordkeeping responsibilities expand. You must retain all receipts, invoices, and statements for every vehicle-related cost you intend to claim. This includes receipts from the gas pump, invoices for repairs and maintenance, insurance policy statements, and bills for registration fees.
For both methods, you need to have specific information about the vehicle itself. This includes the date you first started using it for your business, known as the “placed-in-service” date. You will also need the vehicle’s original purchase price or the details of your lease agreement.
Reporting the Vehicle Deduction on Your Tax Return
After calculating your vehicle deduction using either the standard mileage or actual expense method, you must report it correctly on your tax return. As a sole proprietor, you will report your business income and expenses on Schedule C (Form 1040), Profit or Loss from Business. The vehicle expense deduction is entered on the specific line designated for car and truck expenses.
If you use the actual expense method or are claiming depreciation, you must complete Form 4562, Depreciation and Amortization. This form is used to calculate the depreciation component of your deduction. Part V of this form is for listing vehicle information, where you will enter details like the date the vehicle was placed in service, total miles driven, and business miles driven.
The total depreciation calculated on Form 4562 is then combined with your other actual expenses. The final vehicle deduction amount, whether calculated via the actual expense method or through the standard mileage rate, is then transferred to the appropriate line on your Schedule C.