Can You Write Off a New Car for Your Business?

Businesses can deduct the cost of a new car for business purposes by adhering to specific Internal Revenue Service (IRS) guidelines. This involves understanding how the vehicle is used and maintaining meticulous records to support claimed deductions. Following these rules can help businesses reduce their taxable income when acquiring a new vehicle for operations.

Qualifying for a Car Deduction

To qualify for a car deduction, the vehicle must be used for business purposes. This includes travel between job sites, meeting with clients, or picking up supplies. Commuting to and from your regular place of work is generally not a deductible business expense.

Expenses must also be “ordinary and necessary.” An ordinary expense is common and accepted in your industry, while a necessary expense is helpful and appropriate for your business. It must be reasonable and directly connected to your business activities, not necessarily indispensable. If a vehicle is used for both business and personal activities, only the business portion is deductible.

Methods for Deducting Car Expenses

Businesses can choose between two main methods for deducting car expenses: the standard mileage rate or the actual expenses method. The choice often depends on the vehicle’s cost, business mileage, and preferred level of record-keeping.

Standard Mileage Rate

The standard mileage rate simplifies calculating the deduction for business vehicle use. For 2025, the rate is 70 cents per mile, covering depreciation, gasoline, oil, repairs, and insurance. While simpler, this method requires tracking only total business miles driven. Parking fees and tolls for business purposes can be deducted separately.

If you choose the standard mileage rate for a vehicle you own, you must use it in the first year the car is available for business use, though you can switch to actual expenses in later years. For a leased vehicle, you must use the standard mileage rate for the entire lease period if elected initially.

Actual Expenses Method

The actual expenses method allows businesses to deduct the specific costs of operating the vehicle for business. This approach typically requires more detailed record-keeping. Deductible expenses include gas, oil, repairs, maintenance, insurance, registration fees, and interest paid on a car loan.

Depreciation is a significant component of the actual expenses method for purchased vehicles. Several depreciation methods apply to business vehicles, including Section 179 deduction, bonus depreciation, and the Modified Accelerated Cost Recovery System (MACRS).

The Section 179 deduction allows businesses to expense the full purchase price of qualifying equipment, including certain vehicles, in the year they are placed in service. For 2025, the Section 179 deduction limit is $2,500,000, phasing out when total eligible purchases exceed $4,000,000. Certain heavy vehicles, generally those with a gross vehicle weight rating (GVWR) over 6,000 pounds, may qualify for a full Section 179 deduction.

Bonus depreciation provides an additional first-year deduction for new and used qualified property. One hundred percent bonus depreciation is available for qualifying assets placed in service. For vehicles, if the business use percentage is 50% or less, neither Section 179 nor bonus depreciation can be claimed. In such cases, depreciation must be calculated using the straight-line method over a five-year recovery period.

Luxury car depreciation limits also apply, restricting the amount of depreciation that can be claimed annually for passenger vehicles. For a passenger car placed in service in 2025, the first-year depreciation limit with bonus depreciation is $20,200. Without bonus depreciation, the first-year limit is $12,200. These limits apply to passenger automobiles, which include trucks and vans.

Choosing between the standard mileage rate and actual expenses involves evaluating the total deduction each method provides. If actual expenses, particularly depreciation, are high, that method might offer a larger deduction. However, the standard mileage rate simplifies record-keeping and may be preferable for lower mileage or less expensive vehicles.

Information and Records for Your Deduction

Accurate record-keeping is fundamental for substantiating any car expense deduction. The IRS requires specific documentation regardless of the method chosen. Maintaining these records contemporaneously, at or near the time of the expense or trip, is highly recommended.

Mileage tracking is paramount. A detailed mileage log should include the date of each trip, the starting point and destination, the business purpose, and the total mileage for that trip. It is also advisable to record the total annual mileage, annual business mileage, and odometer readings at the beginning and end of the year. This log helps determine the business use percentage of the vehicle, crucial for allocating actual expenses and depreciation.

For those opting for the actual expenses method, documentation for all vehicle-related costs is necessary. This includes retaining receipts for purchases such as gasoline, oil, and tires. Records for repairs, maintenance, insurance premiums, and vehicle registration fees must also be kept. Statements for car loan interest or lease payments are also important to retain.

Beyond daily logs and expense receipts, businesses should keep general vehicle information. This includes the vehicle’s purchase price, the date it was placed in service for business use, and any other relevant details that support claimed deductions. These detailed records are essential for demonstrating compliance with tax regulations, especially during an IRS inquiry or audit.

Claiming the Car Deduction

After calculating the eligible deduction using either the standard mileage rate or actual expenses, the final step involves reporting these amounts on your tax return. The specific forms used depend on your business structure.

Self-employed individuals, including sole proprietors and owners of single-member LLCs, typically report their business car expenses on Schedule C (Form 1040). If the actual expenses method is used and includes depreciation, Form 4562 must also be completed. The depreciation amount calculated on Form 4562 is then carried over to Schedule C.

For certain types of employees, such as qualified performing artists or fee-basis state or local government officials, unreimbursed employee car expenses might be reported on Form 2106. However, for most employees, unreimbursed business expenses are generally not deductible under current tax law.