What Vehicle Expenses Are Tax Deductible?

Understanding vehicle expense deductibility is important for tax planning for many individuals and businesses. When a vehicle is used for business purposes, a portion of its associated costs may be eligible for a tax deduction. Comprehending the specific rules and requirements for claiming these deductions is essential to ensure compliance with tax regulations.

Determining Business Use

Vehicle expenses must be “ordinary and necessary” for business or income-producing activity, meaning they are common, accepted, and helpful for the business. Distinguish between personal vehicle use, commuting, and deductible business use. Travel between a home and a regular place of business is generally considered non-deductible commuting.

Business travel includes visiting clients, traveling between multiple job sites, or attending meetings away from the regular workplace. Only the portion of vehicle expenses directly related to these business activities is deductible. The business use percentage, calculated by dividing total business miles by total miles driven, determines the deductible amount. For example, if 6,000 of 10,000 miles are for business, the percentage is 60%. This percentage is then applied to most deductible expenses.

Standard Mileage Rate

The standard mileage rate simplifies vehicle expense deductions by allowing taxpayers to multiply a set rate per mile by business miles driven. For 2025, the standard business mileage rate is 70 cents per mile. This rate covers costs like depreciation, fuel, oil, repairs, maintenance, insurance, and vehicle registration fees. Taxpayers generally cannot use the standard mileage rate if they operate five or more vehicles simultaneously. Parking fees and tolls incurred for business purposes are deductible in addition to the standard mileage rate.

The Internal Revenue Service (IRS) publishes this rate annually. Taxpayers choose between the standard mileage rate and actual expense method in the vehicle’s first business use year. Choosing actual expenses first prevents switching to standard mileage for that vehicle. However, starting with standard mileage allows switching to actual expenses later.

Actual Expense Method

The actual expense method allows deduction of direct vehicle operating costs, requiring meticulous record-keeping. Deductible expenses include gas, oil, repairs, maintenance, and new tires. Other deductible costs encompass insurance, registration fees, and license plates. Lease payments for business vehicles are deductible, though specific rules for luxury vehicles may apply. For self-employed individuals, interest paid on a car loan for a business vehicle is also a deductible expense.

Depreciation, a substantial component, allows vehicle cost recovery over its useful life. Accelerated depreciation methods, like Section 179 and bonus depreciation, allow a more immediate write-off. Only the business portion of all these actual expenses, determined by the business use percentage, is deductible.

Recordkeeping Requirements

Accurate record-keeping is essential for substantiating vehicle expense deductions. Both methods require detailed mileage logs. Logs should record date, destination, purpose, and total mileage for each business trip.

If using the actual expense method, receipts for fuel, repairs, maintenance, insurance, and registration fees are necessary. Further records, such as purchase agreements, lease agreements, and maintenance records, support vehicle cost and ongoing expenses. Maintain records contemporaneously, meaning when expenses are incurred. Failure to maintain adequate records can lead to the disallowance of deductions by the IRS, as the burden of proof rests with the taxpayer.

Specific Rules and Limitations

The deductibility of vehicle expenses varies significantly based on the taxpayer’s employment status. Unreimbursed employee business expenses, including vehicle-related costs, are no longer deductible for W-2 employees. Vehicle expense deductions primarily apply to self-employed individuals and business owners.

Limitations apply to depreciation for passenger vehicles, known as “luxury car limits,” regardless of cost. For a passenger car placed in service in 2025, the maximum first-year depreciation deduction with bonus depreciation is $20,200. Vehicles with a Gross Vehicle Weight Rating (GVWR) exceeding 6,000 pounds may be exempt from these limits.

Heavier vehicles, such as certain SUVs and trucks, can be eligible for larger deductions, including full Section 179 expensing or bonus depreciation in the year placed in service, if used over 50% for business. For 2025, the Section 179 deduction limit for heavy SUVs (between 6,001 and 14,000 lbs GVWR) is $31,300. Additionally, bonus depreciation for 2025 is set at 40% and is available for both new and used vehicles. If an employer reimburses an employee for vehicle expenses under an accountable plan, the employee cannot deduct those expenses. An accountable plan requires a business connection, expense substantiation, and return of excess payments.