How Much of a Car Can You Write Off for Business?

Businesses often incur costs for vehicles used in their operations, and a portion of these expenses may be deductible for tax purposes. Understanding these deductions can significantly reduce a business’s taxable income. Maximizing these potential tax benefits involves careful consideration of how the vehicle is used and its associated costs.

Qualifying for Business Vehicle Deductions

To deduct vehicle expenses, the vehicle must be used for business purposes. This includes activities directly related to earning income, such as traveling to client meetings, making deliveries, visiting temporary work locations, or attending business conferences.

A distinction exists between deductible business mileage and non-deductible personal mileage. Commuting between a taxpayer’s home and their regular place of business is considered personal use and is not deductible. However, mileage for travel between business locations, or from a home office (if it’s the principal place of business) to other work sites, generally qualifies as business use.

Vehicles eligible for deductions include cars, vans, pickup trucks, and SUVs. The vehicle’s direct and regular use in income-generating activities is the primary factor for eligibility. The extent of business use directly impacts the deductible amount, requiring clear separation of business and personal travel.

Methods for Deducting Vehicle Expenses

There are two primary methods for calculating vehicle expense deductions: the standard mileage rate method and the actual expense method. Each approach has distinct rules, and the choice depends on a business’s specific circumstances.

The standard mileage rate simplifies deductions by applying a set rate per business mile driven. The IRS determines this annual rate, which covers costs like gas, oil, maintenance, repairs, tires, insurance, and depreciation. For 2024, the rate is 67 cents per mile, increasing to 70 cents per mile for 2025. Parking fees and tolls for business purposes are deductible in addition to this rate.

The standard mileage rate has specific requirements. For example, a taxpayer generally cannot have used the actual expense method for that vehicle in the first year it was placed in service for business. This method typically applies to businesses with fewer than five vehicles used simultaneously for business purposes. Opting for the standard mileage rate simplifies record-keeping, as it eliminates the need to track every individual expense.

Alternatively, the actual expense method allows a business to deduct the actual costs of operating the vehicle. This includes expenses such as gasoline, oil, repairs, maintenance, tires, insurance premiums, vehicle registration fees, and licenses. A portion of the vehicle’s depreciation or lease payments can also be included. For accurate deduction, businesses must track and allocate all expenses between business and personal use based on mileage.

This method may be more beneficial for businesses with higher operating costs, such as those with expensive vehicles or significant repair expenses. For instance, if a vehicle consumes a large amount of fuel or requires frequent, costly repairs, deducting actual expenses could result in a larger write-off than the standard mileage rate. This method also allows for the deduction of interest paid on a car loan if the vehicle is financed.

Specific Deductions and Limitations

When using the actual expense method, specific rules and limitations apply to certain deductions, particularly regarding depreciation and leased vehicles. These rules prevent excessive write-offs for certain vehicle types, directly impacting the deductible amount.

Depreciation allows businesses to recover a vehicle’s cost over its useful life, and this deduction applies only to the business-use portion. Section 179 and bonus depreciation are accelerated methods for a more immediate write-off. Section 179 enables businesses to expense the cost of qualifying property, including vehicles, in the year it is placed in service. For 2024, the maximum Section 179 deduction is $1,220,000, with a phase-out beginning when total property placed in service exceeds $3,050,000.

Bonus depreciation is an additional first-year depreciation allowance. For qualified property placed in service in 2024, the bonus depreciation rate is 60% of the vehicle’s depreciable basis. This rate is scheduled to decrease in subsequent years. Both Section 179 and bonus depreciation can apply to new and used vehicles, provided the used vehicle is new to the taxpayer’s business.

Passenger automobiles (vehicles with a gross vehicle weight rating of 6,000 pounds or less) are subject to “luxury vehicle” depreciation limits. For vehicles placed in service in 2024 where bonus depreciation is claimed, the maximum first-year depreciation deduction is $20,400. Without bonus depreciation, the first-year limit is $12,400. These limits continue for subsequent years.

Leased vehicles also have specific deduction rules. Businesses can deduct the portion of lease payments attributable to business use. However, an “income inclusion amount” or “lease inclusion amount” may apply to prevent circumventing depreciation limits. This rule requires taxpayers to include a certain amount in their gross income, effectively reducing the deductible lease payment, if the vehicle’s fair market value exceeds a specific threshold.

For a passenger car first leased in 2024, this threshold is $62,000, and for an SUV, truck, or van, it is $64,000. The exact inclusion amount is determined by IRS tables based on the vehicle’s value and the lease start year.

Heavier vehicles (GVWR exceeding 6,000 pounds but not more than 14,000 pounds) may be exempt from passenger automobile depreciation limits. This often allows for a larger Section 179 deduction, with a specific limit of $30,500 for these vehicles in 2024. Such vehicles typically include larger SUVs, commercial vans, and pickup trucks. All deductions, regardless of vehicle type, require the vehicle to be used more than 50% for business purposes.

Record Keeping for Vehicle Expenses

Maintaining accurate records is fundamental for substantiating business vehicle expense deductions. The IRS requires “adequate records” to support claimed deductions, ensuring the business use of the vehicle and associated costs can be verified.

Key information to record for each trip includes:
The date
The total mileage for the trip
The specific purpose of the trip
The destination

This log helps differentiate between business, commuting, and personal mileage, which is crucial for calculating the deductible portion of expenses. Businesses should also record the vehicle’s total mileage for the year.

For actual expenses, all costs related to operating the vehicle must be documented with receipts or other verifiable records. This includes expenditures for gas, oil, repairs, maintenance, insurance, and registration fees. Contemporaneous record-keeping (keeping records as expenses are incurred) is recommended to ensure accuracy and completeness.

Various methods can assist with record keeping, such as manual mileage logs, digital spreadsheets, or specialized mobile applications designed to track mileage and expenses. Digital receipts for vehicle-related purchases can also be stored electronically. Consistent record-keeping supports the accuracy of claimed deductions and demonstrates compliance with tax regulations.