How to Write Off a Vehicle for Your Business
Optimize your tax savings by understanding how to properly deduct business vehicle expenses. Learn the rules for car write-offs.
When a vehicle is used for business, its associated costs can often be deducted, reducing taxable income. This applies to individuals and small businesses that utilize a vehicle for work-related activities. The ability to deduct these expenses recognizes that the vehicle serves as a tool for generating income.
Qualifying for Vehicle Deductions
For a vehicle to qualify for tax deductions, its use must be directly related to business activities. The IRS categorizes vehicle use as business, commuting, or personal. Only business use is deductible. Business use involves travel between different business locations, such as visiting clients, running errands, or traveling between job sites.
Commuting, which is travel between your home and a regular workplace, is generally not deductible, even if you perform business-related tasks during that travel. However, if you travel from your home to a temporary worksite, this mileage can be deductible, especially if you have an established regular place of business. Personal use, such as driving for shopping or family outings, is never deductible.
Self-employed individuals, independent contractors, and small business owners are eligible to claim vehicle deductions. Employees typically cannot deduct unreimbursed work-related car expenses due to changes from the Tax Cuts and Jobs Act (TCJA), with limited exceptions for certain professions like Armed Forces reservists or qualified performing artists. Taxpayers can choose between two main methods to calculate their vehicle deductions: the standard mileage rate method or the actual expense method.
Standard Mileage Rate Method
The standard mileage rate method simplifies vehicle deductions by allowing taxpayers to deduct a set amount for each business mile driven. For 2024, the business standard mileage rate is 67 cents per mile, and for 2025, it increased to 70 cents per mile. This rate covers most operating costs, including fuel, maintenance, insurance, and depreciation.
When using the standard mileage rate, you do not separately deduct these individual expenses. However, business-related parking fees and tolls can be deducted in addition to the standard mileage rate. Maintain an accurate mileage log, detailing the date, destination, purpose, and business miles driven for each journey. This record-keeping substantiates your deduction in case of an IRS inquiry.
To use the standard mileage rate for a vehicle you own, you must elect this method in the first year the vehicle is used for business. In subsequent years, you can choose between the standard mileage rate or the actual expense method. For leased vehicles, if you choose the standard mileage rate, you must continue to use it for the entire lease period, including any renewals.
Actual Expense Method
The actual expense method allows taxpayers to deduct the specific costs incurred for business use of their vehicle. This approach requires accurate record-keeping of all vehicle-related expenses. Deductible expenses include gasoline, oil, repairs, maintenance, tires, insurance premiums, vehicle registration fees, and lease payments. Interest paid on a car loan for a business vehicle is also deductible.
Depreciation is a key component of the actual expense method, accounting for the decline in value of a purchased vehicle over time. The deductible amount of each expense, including depreciation, is determined by the percentage of the vehicle’s business use. For example, if a vehicle is used 70% for business, then 70% of the total actual expenses can be deducted.
For purchased vehicles, special depreciation allowances like Section 179 and bonus depreciation can significantly increase the first-year 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 it is placed in service. Specific limits apply, including higher limits for heavy SUVs and trucks.
Bonus depreciation allows businesses to deduct an additional percentage of the cost of qualifying new or used property in the first year. The percentage decreases over time. Both Section 179 and bonus depreciation have specific limitations and rules, particularly for luxury vehicles or those under 6,000 pounds GVWR. To claim these deductions, business use of the vehicle must be greater than 50%. Maintaining receipts for all expenses and a detailed log of both business and total mileage is essential to support actual expense deductions.
Reporting Your Vehicle Deductions
Once the vehicle deduction is calculated, whether using the standard mileage rate or the actual expense method, it must be reported on the appropriate tax form. For self-employed individuals and small business owners, vehicle expenses are typically reported on Schedule C (Form 1040), Profit or Loss from Business. Line 9 of Schedule C is designated for car and truck expenses.
If the standard mileage rate is used, the total deductible amount is entered on Schedule C, Line 9. Separate entries for depreciation, rent, or lease payments are not made as these are already factored into the rate. When using the actual expense method, specific expenses like gas, oil, and insurance are included on Line 9, while depreciation is reported on Line 13 and lease payments on Line 20a of Schedule C. If claiming depreciation, Form 4562, Depreciation and Amortization, may need to be filed.
Accurate record-keeping is essential to support any reported vehicle deductions. The IRS requires taxpayers to maintain records, such as mileage logs and receipts for expenses, to substantiate the business use of the vehicle and the amounts claimed. These records are important in the event of an audit, demonstrating compliance with tax regulations.