How Much of My Car Payment Can I Write Off?

Individuals often use their cars for work and may deduct associated costs on their taxes. The ability to deduct car-related expenses depends on how the vehicle is used and whether it is owned or leased. If a vehicle is used for business, certain expenses can be considered for a tax deduction.

Who Can Deduct Car Expenses and What Qualifies

To deduct car expenses, the vehicle must be used for business purposes. This includes activities such as driving to client meetings, making deliveries, or traveling between different job sites if self-employed. The portion of vehicle use dedicated to personal activities, such as commuting from home to a regular workplace or running personal errands, is not deductible.

Self-employed individuals, including independent contractors, freelancers, and gig-workers, can deduct business vehicle expenses on Schedule C (Form 1040). Employees generally cannot deduct unreimbursed employee business expenses after the Tax Cuts and Jobs Act of 2017 suspended these deductions until 2026.

The entire car payment is typically not deductible. Instead, specific components or related expenses qualify for a deduction. For purchased vehicles, this often involves interest paid on a car loan and depreciation. For leased vehicles, a portion of the lease payments may be deductible.

Understanding the Deduction Methods

Taxpayers have two primary methods for calculating vehicle expense deductions: the standard mileage rate method or the actual expense method. The choice between these methods can impact the deductible amount and the required recordkeeping. It is often beneficial to calculate the deduction using both methods to determine which yields a larger tax benefit.

The standard mileage rate simplifies the deduction process by allowing a fixed amount for each business mile driven. This rate, set annually by the IRS, covers most vehicle-related costs, including gas, oil, maintenance, repairs, depreciation, and insurance. For 2025, the standard mileage rate is 70 cents per business mile. While comprehensive, this method still allows for separate deductions of business-related parking fees and tolls.

Conversely, the actual expense method involves itemizing and deducting the specific costs of operating the vehicle for business. Deductible expenses under this method can include gas and oil, repairs and maintenance, tires, insurance premiums, vehicle registration fees, and licenses. For purchased vehicles, interest on a car loan and depreciation are also deductible under this method. Lease payments are deductible for leased vehicles.

A taxpayer must choose one method in the first year a vehicle is used for business. If the standard mileage rate is chosen for a vehicle initially, a taxpayer can switch to the actual expense method in later years. However, if the actual expense method is chosen initially for an owned vehicle, a taxpayer cannot switch to the standard mileage rate for that vehicle in subsequent years. For leased vehicles, if the standard mileage rate is chosen, it must be used for the entire lease period.

Deductions for Purchased Vehicles

Interest paid on a car loan is deductible for the business-use portion of the vehicle. Only the interest component of the loan payment is deductible, not the principal amount.

Depreciation allows businesses to recover the cost of the vehicle over its useful life. This deduction recognizes the gradual wear and tear on an asset. The Section 179 deduction is an immediate expensing election, allowing businesses to deduct the full purchase price of qualifying equipment, including vehicles, in the year they are placed in service, up to certain limits. For 2025, the Section 179 deduction limit is $1,250,000, with a total equipment spending cap of $3,130,000, beyond which the deduction begins to phase out.

Specific rules apply to vehicles, especially those with a gross vehicle weight rating (GVWR) over 6,000 pounds but under 14,000 pounds, which are often capped at a higher Section 179 deduction. For 2025, the Section 179 deduction limit for these heavier SUVs is $31,300. Vehicles with a GVWR over 14,000 pounds or those modified for non-personal use, such as certain delivery vans or shuttle vehicles, may qualify for a full Section 179 deduction without this cap.

Bonus depreciation is another accelerated depreciation method that allows businesses to deduct a percentage of the cost of new or used qualified property in the year it is placed in service. For 2025, bonus depreciation is 40%, continuing its gradual phase-out from 100% in prior years. This deduction can be claimed in addition to Section 179.

Annual depreciation limits, often called “luxury car limits,” cap the total amount of depreciation, including Section 179 and bonus depreciation, for passenger vehicles. For a passenger car placed in service in 2025, the first-year depreciation limit with bonus depreciation is $20,200. These limits apply regardless of the vehicle’s cost or business use percentage.

Deductions for Leased Vehicles

Leased vehicles offer opportunities for tax deductions, primarily through the lease payments themselves. The actual lease payments made are generally deductible, prorated for the vehicle’s business-use percentage.

A specific rule, the “lease inclusion amount,” applies to leased vehicles with a fair market value above a certain threshold. This rule prevents taxpayers from deducting the full cost of a luxury vehicle over a short lease term, aiming to equalize tax treatment between leasing and owning. For a vehicle first leased in 2025, a lease inclusion amount must be added back to income if its fair market value exceeds $62,000 for a passenger car or SUV/truck/van. This effectively reduces the deductible portion of the lease payments.

The lease inclusion amount is determined using IRS tables based on the vehicle’s fair market value and the year the lease began. While it may seem like an additional income item, its practical effect is a reduction in the deductible lease expense. This contrasts with the depreciation, Section 179, and bonus depreciation rules applicable to purchased vehicles.

Key Requirements for Claiming Deductions

Claiming vehicle expense deductions requires diligent recordkeeping to substantiate the business use and associated costs. The IRS mandates accurate and contemporaneous records to support any claimed deduction. Without proper documentation, deductions may be disallowed.

Taxpayers must track specific information for each business trip. This includes the date of the trip, the destination, and the business purpose. Additionally, keeping a record of the total miles driven for business, commuting, and personal purposes is essential to accurately calculate the business-use percentage. Odometer readings at the start and end of trips or the year can help in this calculation.

For actual expenses, taxpayers must maintain detailed records of all costs incurred. This includes receipts for gas, oil, repairs, tires, insurance premiums, and statements for loan interest or lease payments. These records should clearly show the cost, the date of the expense, and what it was for.

Regardless of the method chosen, only the portion of expenses attributable to business use is deductible. The total expenses or mileage are then prorated based on the percentage of business use. For example, if a vehicle is used 70% for business and 30% for personal purposes, only 70% of the qualified expenses are deductible. Maintaining detailed records ensures compliance with IRS substantiation requirements.