Can I Write Off a Vehicle Purchase for My Business?

Acquiring a vehicle for business operations can offer tax deductions. Understanding the specific rules and requirements is essential to properly utilize these deductions. The ability to write off a vehicle purchase depends on how the vehicle is used, the deduction method chosen, and careful record-keeping.

Determining Business Use

The primary condition for deducting vehicle expenses is demonstrating its business use. Only the portion of vehicle usage directly attributable to business activities is deductible. Examples of business use include travel between business locations, trips to client sites, or journeys to pick up supplies. Commuting between a home and a regular place of business, or any purely personal travel, does not qualify.

To determine the deductible amount, businesses must calculate the percentage of business use. This involves tracking total miles driven and identifying business miles. The business use percentage is then applied to the vehicle’s cost or operating expenses. For example, if 7,000 of 10,000 annual miles are for business, 70% of eligible expenses can be deducted.

Standard Mileage Versus Actual Expenses

Businesses have two primary methods for deducting vehicle expenses: the standard mileage rate method or the actual expense method. Choosing the most advantageous method depends on individual circumstances, such as total miles driven and costs incurred.

The standard mileage rate method offers a simplified way to calculate deductions. This rate, set annually by the IRS, covers average operating costs like depreciation, fuel, oil, maintenance, and insurance. For 2024, the rate is 67 cents per mile, increasing to 70 cents per mile for 2025. This method is often preferred for its simplicity, as it reduces the need to track every individual expense.

Alternatively, the actual expense method allows businesses to deduct specific operating costs. These include fuel, oil, repairs, tires, insurance premiums, vehicle registration fees, and interest paid on a car loan. If the actual expense method is chosen in the first year a vehicle is placed in service, a business generally cannot switch to the standard mileage rate for that vehicle in subsequent years, especially if accelerated depreciation was claimed. However, if the standard mileage rate is used initially for an owned vehicle, a business can switch to the actual expense method later, provided the vehicle is not fully depreciated. For leased vehicles, if the standard mileage rate is chosen, it must be used for the entire lease period.

Depreciation and Other Actual Expenses

The actual expense method allows for the deduction of various vehicle-related costs, with depreciation being a significant component. Businesses can deduct a portion of the vehicle’s purchase price over time through depreciation, which accounts for wear and tear.

When depreciating a business vehicle, several methods and limitations apply. The Modified Accelerated Cost Recovery System (MACRS) is the standard depreciation method for vehicles placed in service after 1986, classifying them as five-year property. Under MACRS, the cost is typically recovered over six calendar years.

The Section 179 deduction allows businesses to immediately expense the full purchase price of qualifying property, including certain vehicles, in the year they are placed in service. For 2024, the maximum Section 179 deduction is $1,220,000, with a phase-out threshold beginning at $3,050,000 in total equipment purchases. For heavy sport utility vehicles (SUVs) and trucks with a gross vehicle weight rating (GVWR) between 6,001 and 14,000 pounds, the maximum Section 179 deduction is capped at $30,500 for 2024. To qualify, the vehicle must be used more than 50% for business purposes and be purchased and placed in service during the same tax year. Both new and used vehicles can qualify, provided they are new to the purchasing business.

Bonus depreciation provides an additional first-year deduction for qualifying assets. For 2024, the bonus depreciation rate is 60% for eligible property, including some vehicles. This rate is scheduled to decrease to 40% in 2025 and 20% in 2026, reaching 0% in 2027, unless extended by Congress. Bonus depreciation can be combined with Section 179; however, specific limits apply for passenger automobiles. For example, a passenger car placed in service in 2024 has a first-year depreciation limit of $20,400 with bonus depreciation.

Luxury vehicle limits impose caps on annual depreciation deductions for passenger automobiles, even if not traditionally considered “luxury” cars. These limits apply to vehicles with an unloaded weight of 6,000 pounds or less. For a passenger car placed in service in 2024, the maximum depreciation deduction, including bonus depreciation, is $20,400 in the first year, $19,800 in the second year, $11,900 in the third year, and $7,160 for the fourth through sixth years. If bonus depreciation is not claimed, the first-year limit for 2024 is $12,400. These limits are adjusted annually for inflation.

Maintaining Proper Records

Regardless of the deduction method chosen, meticulous record-keeping is crucial for substantiating vehicle expenses. The IRS requires detailed documentation to support claimed deductions and demonstrate business use. Failure to maintain adequate records can result in disallowance of deductions, potentially leading to fines or interest.

Essential records include a mileage log detailing each business trip. This log should record the date, destination, specific business purpose, and odometer readings at the start and end of the trip, or total miles driven. The IRS emphasizes “contemporaneous” record-keeping, meaning entries should be made at or near the time of travel.

For those using the actual expense method, additional documentation is necessary. Businesses must keep receipts for all vehicle-related costs, such as fuel purchases, oil changes, repair invoices, insurance premium statements, and registration fees. Loan statements showing interest paid are also important. These records, whether physical or digital, must be organized and readily accessible. Many businesses utilize mobile applications or digital tools to simplify tracking and ensure compliance.