How to Know What Cars Can Be Written Off

Writing off a car involves claiming tax deductions for vehicles used in a business. This allows individuals and businesses to reduce their taxable income by deducting vehicle-related expenses. These deductions can apply to a vehicle’s purchase price or its ongoing operating costs.

Qualifying for Vehicle Tax Deductions

To qualify for tax deductions, a vehicle must primarily serve a business purpose, directly supporting income-generating activities. Examples include a self-employed contractor traveling to job sites or a delivery service driver making deliveries.

Self-employed individuals and small business owners are eligible to claim these deductions. Employees generally cannot deduct unreimbursed business vehicle costs due to recent tax law changes. The IRS requires a vehicle’s primary use, meaning over 50% of its total mileage, to be for business to qualify for accelerated depreciation methods like Section 179 or bonus depreciation.

Ownership or lease of the vehicle is required to claim deductions. This establishes a direct financial connection to the asset and its costs.

Methods for Deducting Vehicle Expenses

Taxpayers have two primary methods for deducting vehicle expenses: the standard mileage rate and the actual expenses method.

The standard mileage rate offers a simplified deduction. For 2024, this rate is 67 cents per business mile driven, covering costs like depreciation, gasoline, oil, repairs, and insurance. However, if accelerated depreciation methods like Section 179 or bonus depreciation were claimed for a vehicle in a prior year, the standard mileage rate cannot be used for that vehicle.

The actual expenses method allows taxpayers to deduct specific costs incurred for business use. These include gasoline, oil, maintenance, repairs, insurance, registration fees, lease payments, tires, garage rent, tolls, and parking fees. All expenses must be prorated based on the vehicle’s business use percentage.

Under the actual expenses method, depreciation is a significant deduction for purchased vehicles. The Modified Accelerated Cost Recovery System (MACRS) is the standard method for depreciating business property. Section 179 and bonus depreciation are two accelerated methods that can provide substantial first-year deductions.

Section 179 Deduction

Section 179 allows businesses to deduct the full purchase price of qualifying equipment, including certain vehicles, up to a specified limit in the year placed in service. For 2024, the maximum Section 179 deduction is $1,220,000, with a phase-out beginning at $3,050,000 of property placed in service. This deduction is limited by the taxpayer’s business income, meaning it cannot create a net loss greater than the business income.

Bonus Depreciation

Bonus depreciation allows businesses to deduct a percentage of the cost of qualified new and used property in the first year it is placed in service. For 2024, the bonus depreciation rate is 60%, phasing down to 40% in 2025, 20% in 2026, and 0% in 2027. Bonus depreciation can be combined with Section 179.

Luxury Car Limits

Passenger automobiles are subject to specific annual depreciation limits, known as “luxury car limits.” For passenger automobiles placed in service in 2024, the maximum first-year depreciation deduction is $20,400 if bonus depreciation is claimed, or $12,400 if not claimed.

Specific Vehicle Considerations

Certain vehicle types receive different tax treatment regarding Section 179 and bonus depreciation limits.

Vehicles with a Gross Vehicle Weight Rating (GVWR) exceeding 6,000 pounds, such as heavy SUVs, pickup trucks, and vans, are often popular for business write-offs. These vehicles are generally exempt from “luxury car” depreciation limits, allowing for larger Section 179 or bonus depreciation deductions. For 2024, the Section 179 deduction for these heavy vehicles is capped at $30,500.

Passenger automobiles, typically with a GVWR under 6,000 pounds, are subject to stricter depreciation limits. For vehicles placed in service in 2024, the first-year deduction, including bonus depreciation, is capped at $20,400.

Lease payments for business vehicles are generally deductible as actual expenses. However, for leased luxury vehicles, an “inclusion amount” may apply, reducing the deductible lease expense. For vehicles first leased in 2024, an inclusion amount applies if the vehicle’s fair market value exceeds $62,000 for a passenger car or $64,000 for an SUV, truck, or van.

Maintaining Records for Vehicle Deductions

Accurate record-keeping is crucial for substantiating vehicle tax deductions and ensuring IRS compliance. Taxpayers must prove the business use of their vehicle and all associated expenses, as inadequate records can lead to disallowed deductions and penalties.

A contemporaneous mileage log is a primary document required by the IRS. This log should detail each business trip, including date, destination, purpose, and starting and ending odometer readings. Tracking total miles driven, both business and personal, is essential for calculating the business use percentage.

For the actual expenses method, taxpayers must retain receipts for all vehicle-related costs, such as gasoline, oil changes, maintenance, repairs, insurance, and registration fees. For purchased vehicles, records of cost, in-service date, and depreciation calculations (including Section 179 or bonus depreciation) are necessary. Lease agreements are required for leased vehicles.

Other supporting documentation, such as client invoices or appointment calendars, should also be retained. Maintaining organized and detailed records throughout the tax year helps avoid issues during an audit.

Reporting Vehicle Deductions on Tax Forms

After meeting eligibility and maintaining records, accurately report vehicle deductions on the appropriate tax forms. The specific forms depend on the taxpayer’s business structure and deduction type.

Self-employed individuals and sole proprietors report vehicle expenses on Schedule C (Form 1040), Profit or Loss from Business. Vehicle expenses are listed as a deductible business expense, with the business use percentage applied to the total.

Depreciation, including Section 179 and bonus depreciation, is calculated and reported on Form 4562, Depreciation and Amortization. This form details the asset’s cost, depreciation method, and current year’s claimed amount. The total depreciation from Form 4562 is then reported on Schedule C.

Employees generally cannot deduct unreimbursed business vehicle costs due to recent tax law changes. Therefore, most will not report these expenses on personal tax returns.