Is a New Car Tax Deductible for Your Business?

While personal vehicle purchases are generally not tax-deductible, an exception applies when a car is acquired and used for business purposes. Businesses may deduct a portion of the purchase price and ongoing operational expenses, offering a financial advantage if specific tax regulations are followed.

Deducting Business Use of a New Car

Businesses can deduct new car costs using two methods: the standard mileage rate or actual expenses. The standard mileage rate offers a simpler approach, providing a fixed per-mile deduction for business travel. This rate was 67 cents per mile in 2024 and increased to 70 cents per mile in 2025, covering depreciation, fuel, oil, maintenance, and insurance.

Taxpayers must choose the standard mileage rate in the first year a car is placed in business service. In subsequent years, they can elect either the standard mileage rate or actual expenses. However, for leased vehicles, the standard mileage rate, once chosen, must be used for the entire lease term.

Alternatively, businesses can deduct actual expenses for the vehicle’s business use. This includes costs like gasoline, oil, repairs, insurance premiums, and vehicle registration fees. A substantial portion of the vehicle’s purchase price can also be recovered through depreciation deductions.

Depreciation allocates an asset’s cost over its useful life. For new business cars, accelerated depreciation methods can provide significant first-year deductions. Section 179 expensing allows businesses to deduct the full purchase price of qualifying property, including vehicles, up to a specified limit in the year it is placed in service. The maximum Section 179 deduction was $1,220,000 in 2024, phasing out if total Section 179 property exceeded $3,050,000. In 2025, the maximum deduction is $1,250,000, with a phase-out threshold of $3,130,000.

A specific Section 179 limit applies to heavy vehicles, including sport utility vehicles, with a gross vehicle weight rating (GVWR) between 6,000 and 14,000 pounds. For 2024, the maximum Section 179 deduction for these vehicles was $30,500. To qualify for Section 179, the vehicle must be used over 50% for business and placed into service by December 31 of the tax year.

Bonus depreciation allows businesses to deduct an extra percentage of eligible property’s cost in the first year it is placed in service. The bonus depreciation rate was 60% in 2024. This rate is scheduled to decrease to 40% in 2025, 20% in 2026, and phase out by 2027. Bonus depreciation applies to both new and used qualifying equipment.

Limitations apply to depreciation deductions for passenger automobiles, sometimes called “luxury car” limits. For vehicles placed in service in 2024, the total depreciation deduction, including bonus depreciation, was capped at $20,400 for the first year. Subsequent year caps were $19,800 (second), $11,900 (third), and $7,160 (each succeeding year). For 2025, the first-year depreciation limit with bonus depreciation is $20,200. If a vehicle’s business use drops to 50% or less, it becomes ineligible for Section 179 or bonus depreciation.

When choosing between the standard mileage rate and actual expenses, businesses should consider the vehicle’s purchase price, annual mileage, and tax year. For high-mileage vehicles, the standard mileage rate might offer a simpler, larger deduction. For expensive vehicles with significant operating costs, the actual expense method, especially with accelerated depreciation, could yield a more substantial tax benefit. The initial choice for an owned vehicle allows flexibility in subsequent years.

Other Deductions Related to New Car Ownership

Beyond primary business use deductions, other tax deductions relate to car ownership. These address specific expenses not covered by the standard mileage rate or general operating costs. Understanding these opportunities can further reduce a business’s taxable income.

One deduction involves state and local general sales taxes paid on a new car purchase. Taxpayers can deduct these sales taxes instead of state and local income taxes if they itemize. This is subject to the overall State and Local Tax (SALT) deduction limit. For 2024, this cap was $10,000 for most filers. For tax years beginning after December 31, 2024, the SALT deduction cap temporarily increases to $40,000.

Interest paid on a personal car loan is generally not tax-deductible. However, if a car is used for business, the interest corresponding to the business portion of the loan can be deducted. This allows businesses to deduct financing costs directly attributable to commercial activities, proportionate to the percentage of business use.

Even if a car’s purchase is not deductible, mileage for specific non-business purposes may offer a tax benefit. Mileage driven for medical or charitable activities can be deducted. For 2024, the medical rate was 21 cents per mile, and the charitable rate was 14 cents per mile. These deductions are typically claimed as itemized deductions and are subject to limitations.

Substantiating Car-Related Deductions

To claim car-related tax deductions, especially for business use, maintaining comprehensive records is essential. The IRS requires thorough documentation to substantiate all claimed expenses. Without proper records, deductions may be disallowed upon audit.

Businesses should keep detailed mileage logs, including date, destination, purpose, and total mileage for each business trip. For actual expenses, retain all receipts for gas, oil, repairs, insurance, and other vehicle costs. Other relevant documentation, like loan or lease contracts, should also be kept.

It is crucial to differentiate clearly between business and personal vehicle use. Only expenses directly attributable to business use are deductible. Accurate record-keeping allows for precise calculation of the business-use percentage, applied to total vehicle expenses. Failure to maintain these records can result in disallowed deductions and additional tax liabilities.