Vehicle Tax Deductions and Write-Offs Explained

If you use a vehicle as part of your business operations, such as to deliver products or drive to worksites, your company may be eligible for certain tax deductions. But there are a few important details to consider so you know what you can include, when you can do it, and how to write off these expenses.

What Vehicles Qualify for Tax Deductions

You may qualify to deduct some of your vehicle-related expenses if you use your car for business purposes. The IRS defines a car as any four-wheeled vehicle—including a truck or van—intended for use on public streets, roads, and highways. It mustn't exceed 6,000 pounds in unloaded gross weight. Exceptions include ambulances, hearses, vehicles used to transport people or property for money or hire, or trucks or vans that are qualified nonpersonal use vehicles.

You can take this tax deduction in a few different ways, from the standard mileage rate and actual car expenses to the Section 179 deduction. However, if you use your car for both business and personal driving, you must split the expenses based on your actual mileage.

Mileage Deductions

When calculating your standard mileage rate, you will multiply how many business miles you drove by the standard mileage rate. This rate changes regularly and in 2022, the standard mileage rate for businesses was set at 58.5 cents per mile. Miles driven to and from work from your home, otherwise known as commuting miles, are not deductible. You must keep detailed records and be able to provide enough evidence to support your claims.

If you use the standard mileage deduction, you can’t include other costs related to your car except for business-related tolls and parking fees. However, parking fees for your workplace aren’t deductible since they’re considered commuting expenses.

To use the standard mileage rate with a vehicle you own, you must use it during the first year your business can use the car. After that initial year, you can choose between the standard mileage rate and actual expenses. If you’re leasing a car, you must stick with the standard mileage rate for the duration of the lease, including renewals.

The IRS outlines the following restrictions for using the standard mileage rate:

• You can’t operate five or more cars, such as running a fleet of delivery vehicles.
• You can’t use any method besides straight line to claim a depreciation deduction for the car.
• You can’t have claimed a Section 179 deduction or the special depreciation allowance on the car.
• You can’t have claimed actual expenses on a leased car after 1997.

Actual Expense Deductions

Alternatively, you can choose to take the actual car expense deduction. To do so, you must keep track of all qualifying car-related expenses. If you drive your car for both personal and business use, you can only deduct the percentage used for business use.

For example, let’s say you’re in sales and drove your car 16,000 miles in 2021—12,000 miles for business and 4,000 miles for personal use. That means you could claim 75% (12,000 ÷ 16,000) of the car’s expenses as business expenses.

The IRS allows you to deduct the following actual car expenses:

• Depreciation
• Licenses
• Gas
• Oil
• Tolls
• Lease payments
• Insurance
• Garage rent
• Parking fees
• Registration fees
• Repairs
• Tires

The Section 179 Deduction

When buying equipment and other lasting items for your business, you’d typically deduct portions of the cost over time through depreciation. However, the Section 179 deduction is an effort to incentivize small business owners to purchase equipment and invest in their companies. Section 179 allows businesses to deduct the full purchase price of qualifying equipment (such as a vehicle) bought or financed and put into service sometime during the same tax year. The deduction limit in 2021 is $1,050,000.

For example, let’s say you spent $20,000 on a new car for your business in June 2021. You use the car for business purposes 75% of the time. If you were to claim the Section 179 deduction, you could take a $15,000 deduction ($20,000 × 0.75) on your 2021 tax return, which you’d file in early 2022.

Section 179 Deduction Limits

To qualify for this deduction, you must use the vehicle for business purposes more than 50% of the time. Plus, you can only claim the Section 179 deduction in the year you put the car into service; a car you acquired for personal purposes in 2020 then changed to business use in 2021 doesn’t qualify for the deduction.

The IRS has specific rules for sport utility vehicles and certain other vehicles, so before purchasing a vehicle for your business, make sure to familiarize yourself with the Section 179 deduction guidelines to see if it will qualify.

Frequently Asked Questions (FAQs)