Is a New Car a Tax Write-Off? What You Can Deduct

A new car is generally considered a “tax write-off” only when it is used for business purposes. The Internal Revenue Service (IRS) permits businesses and self-employed individuals to deduct certain expenses related to vehicles used for work, recognizing that these vehicles contribute to generating income. This deduction helps offset the financial burden of operating a vehicle for business activities. However, the extent of the deduction depends entirely on the vehicle’s business use. Understanding the specific IRS rules and various deduction methods is important for anyone considering a new car purchase with tax savings in mind.

Determining Eligibility for Vehicle Deductions

A vehicle must be used directly for business purposes to be tax-deductible. This includes travel between different work locations within your tax home area, visiting clients, or making deliveries. Commuting between your home and a regular place of work is considered personal use and is generally not deductible.

If a vehicle serves a dual purpose, being used for both business and personal activities, only the portion of expenses directly attributable to business use is deductible. To calculate this, you must prorate expenses based on the percentage of business mileage relative to total mileage driven during the year. For instance, if 60% of your vehicle’s mileage was for business, only 60% of the related expenses can be claimed.

Choosing a Deduction Method

When deducting vehicle expenses, taxpayers have two primary methods: the standard mileage rate or the actual expenses method. Each approach has distinct rules and implications for record-keeping.

The standard mileage rate offers a simplified way to calculate deductions. The IRS sets an annual rate per business mile, which for 2025 is 70 cents per mile. This rate accounts for various costs such as depreciation, gas, oil, repairs, insurance, and registration fees. If you claimed Section 179 or bonus depreciation for the vehicle in a prior year, you cannot use the standard mileage rate for that vehicle.

Alternatively, the actual expenses method involves tracking and deducting all direct costs associated with operating the vehicle for business. Deductible expenses under this method include gas, oil, repairs, maintenance, insurance premiums, registration fees, tires, and depreciation. If the vehicle is leased, lease payments can be deducted, and for financed vehicles, the interest paid on the car loan may also be deductible. This method often yields a larger deduction if your actual vehicle operating costs are higher than what the standard mileage rate would provide, but it demands meticulous record-keeping of every expense. If you choose the actual expense method in the first year a vehicle is placed in service, you generally cannot switch to the standard mileage rate for that vehicle in future years.

Accelerated Depreciation Rules

Beyond regular depreciation, specific tax provisions allow for accelerated write-offs of business vehicles, potentially leading to larger upfront deductions. These methods are Section 179 and bonus depreciation.

The Section 179 deduction permits businesses to deduct the full purchase price of qualifying equipment, including certain vehicles, in the year it is placed in service. For 2025, the maximum Section 179 deduction limit is $1,250,000, with a total equipment spending cap of $3,130,000. Vehicles with a gross vehicle weight rating (GVWR) exceeding 6,000 pounds, such as many SUVs, pickups, and vans, often qualify for higher deduction limits under Section 179, with a cap of $31,300 for 2025 for these heavier vehicles. The deduction amount is prorated based on the percentage of business use, which must be more than 50%.

Bonus depreciation allows businesses to deduct a large percentage of the cost of qualifying new or used property in the year it is placed in service. For 2025, the bonus depreciation rate is 40%. Both Section 179 and bonus depreciation are accelerated methods, meaning they allow for a larger deduction in the initial year, but they do not increase the total amount that can be deducted over the vehicle’s lifespan. If you claim Section 179 or bonus depreciation, you must use the actual expense method for that vehicle.

Understanding Luxury Vehicle Limitations

The IRS imposes annual depreciation limits on passenger vehicles, which include cars, light trucks, and vans with a gross vehicle weight rating (GVWR) of 6,000 pounds or less. These limits apply regardless of whether the standard mileage rate or actual expense method is chosen, and they also affect the amount of Section 179 and bonus depreciation that can be claimed for these lighter vehicles. For a passenger automobile placed in service in 2025, if bonus depreciation is claimed, the first-year deduction limit is $20,200. Without bonus depreciation, the first-year limit is $12,200. These limitations continue in subsequent years, with specific caps. These annual adjustments by the IRS aim to prevent excessive deductions for higher-priced passenger vehicles. The intent is to cap the write-off amounts for vehicles that, while used for business, might also have a significant personal luxury component.

Maintaining Required Documentation

Regardless of the deduction method chosen, keeping meticulous records is paramount to substantiate any vehicle expense deductions claimed on a tax return. The IRS requires adequate records to prove the accuracy and business necessity of expenses. Failure to maintain proper documentation can result in disallowed deductions during an audit.

Your records should include specific details for each business trip: the date, destination, business purpose, and the start and end odometer readings. It is also important to record the total mileage for the entire year, encompassing both business and personal use. For those using the actual expenses method, receipts for all vehicle-related costs, such as gas, repairs, maintenance, insurance, and registration fees, are necessary. These records should be kept contemporaneously, meaning at or near the time of the expense or trip.