Being your own boss may be the American dream, but taking that leap can be costly. To help offset your expenses, you might be able to claim your business vehicle as a deduction.
Learning how to write off a car for business can be challenging if you aren’t a tax guru. We break down what you need to know here.
In years past, employees and business owners alike could write off mileage as a business expense.
But the Tax Cuts and Jobs Act of 2017 changed the rules. Today, only business owners, self-employed contractors and a narrow segment of employees may claim this deduction. Employees here include eligible performance artists, military reservists and fee-based government workers.
Significant portions of this act will expire at the end of 2025. At that time, this rule could change. Also, note that you must meet certain parameters before the IRS will consider travel as a “business mile.”
| Travel that qualifies | Travel that does not qualify |
|---|---|
Miles driven to meet clients Business-related errands like going to the bank or post office Driving to offsite business meetings Traveling from your main office to another office location Rideshare miles (either to pick up passengers or while a passenger is in your car) | Work-related miles you drive as a W-2 employee (in most cases) Miles commuting to and from your regular workplace Personal errands, appointments or events |
How do I write off a car for business?
There are two ways you can write off a car for business: the standard mileage rate or the annual expense method.
Standard mileage rate
Standard mileage rate could give you the biggest deduction if you get good gas mileage and put a lot of business miles on your car each year. Standard mileage rate may also be ideal if your business vehicle has a low cost of ownership.
The easiest way to write off a car for business is to use the standard mileage rate method. This strategy allows you to deduct 67 cents per mile you drive each year. If you drive for business and personal reasons, you can only write off your business miles. However, there is no cap on the number of miles you can deduct.
To illustrate, let’s say you drive your car 12,000 miles a year. Of those 12,000 miles, 10,000 were business miles. This would lead to a potential deduction of $6,700 (because 10,000 x .67 = 6,700).
You can’t claim the standard mileage deduction if you use more than five cars at a time in the course of your business. How you claimed car depreciation in prior years can also exclude you from using this method. Review the IRS’s specific rules for using standard mileage rate.
In addition to your annual mileage, you may be able to deduct:
Auto loan interest
You may be able to write off your business auto loan interest when you file your taxes. Like mileage deductions, the amount of interest you can write off depends on how much you use your vehicle for business.
So, imagine that you use your car for business 40% during the tax year. In that case, you can deduct 40% of the interest you paid on your car loan.
Personal property taxes
You may qualify for a vehicle tax deduction that applies to a portion of your car’s state and local personal property tax. You can do this on Schedule C or Schedule F on Form 1040.
Tolls and parking fees
It’s possible to deduct tolls and parking fees you paid while you drove for business. However, paying to park at your regular workplace doesn’t count. The IRS considers this as a nondeductible commuting expense.
Keep meticulous records
To claim any business car deduction, it’s essential to maintain detailed records. Consider keeping a small notebook in your glovebox and logging your business miles as you drive. You could also download a mileage-tracking app like MileIQ.Also, write down your odometer reading on the first and last day of the tax year. You’ll need these figures to calculate how much you drove your vehicle for business versus personal.In general, you should keep these records for at least three years from the day you filed your tax return.
Actual expense method
The actual expense method may give you the biggest deduction if you have a lot of car-related expenses or a hefty gas or auto insurance bill.
Alternatively, you could use the actual expense method to write off a car for business. With this, you’ll claim your car’s operating expenses rather than the business miles you drive.
Like with the standard mileage rate deduction, you can write off your eligible auto loan interest and personal property taxes, as well as parking and toll fees. Under the actual expense method, you can also claim expenses such as:
- Car depreciation
- Gas
- Oil
- Lease payments
- Car insurance premiums
- Car repairs and maintenance
- Registration fees
Unless you drive 100% for business reasons, you can only deduct a portion of your expenses. The amount you can deduct depends how many business miles you drive compared to personal miles.
To calculate your deductions, add up what you spent on eligible car expenses during the tax year. Then, calculate what percentage of your annual miles were business miles. This percentage represents the portion of the car expenses you may be able to write off.
For a better idea of how the actual expense method works, here’s an example:
You drive 12,000 miles a year, and 10,000 of those miles are for business. That means you could claim 83% of your car-related expenses as a business deduction. The formula here is 10,000 / 12,000 = 0.83, or 83%.
Over the year, you spent $4,000 on car-related expenses, leading to a potential deduction of $3,320 (or 83% of $4,000).
Calculating car depreciation
There are two ways you can calculate depreciation when deducting car expenses.With straight-line depreciation, depreciation is distributed evenly across the useful life of your vehicle.Under the modified accelerated cost recovery system (MACRS), depreciation is front-loaded during the first years you own your vehicle. As your vehicle gets older, the amount of depreciation you can claim goes down.Regardless of the type of car depreciation you use, there are limits to the amount you can deduct each tax year. There are also certain circ*mstances where you must use one method over the other.For more information, see the IRS’s guidelines regarding car depreciation or talk with a tax professional.
For some, the standard mileage rate method could net a larger deduction. For others, the actual expense method is the better choice. Before you file, do the math for each so you can see which one will net you the bigger deduction.
Harkening back to our earlier scenarios, pretend that you drove 12,000, with 10,000 being business miles. You also spent a total of $4,000 on car-related expenses over the year.
If you used standard mileage rate, your deduction would be $6,700. Under the actual expense method, you could write off $3,320. In this case, standard mileage rate would make the most sense.
Choose your method wisely
In many cases, you can switch back and forth between standard mileage rate and actual expense method — but only if you choose standard mileage rate for the first year you write off your business vehicle. If you use the annual expense method in that first year, then you must continue to use it for the duration. Also, if you’re leasing a car for business and use standard mileage rate, you are stuck with it for the entirety of your lease contract.
Does buying a car help with taxes?
Buying a car can help with taxes. Even if you only use your car for personal use, you can deduct the sales tax you paid for your vehicle. However, you have to itemize to do so. You also cannot write off sales tax if you already took a deduction for your state and local income tax.
Business owners and independent contractors could qualify for a separate deduction: Section 179. Section 179 allows an extra depreciation deduction for certain property that you buy for your business.
Section 179 is tricky. How much you can deduct can depend on how much your vehicle weighs. You must also use the vehicle for business more than 50% of the time to qualify, and you cannot claim Section 179 if you use the straight-line method to calculate depreciation.
For more information, please see the IRS’s guidelines regarding Section 179.
This depends on how often you use your vehicle for business. You must also use the actual expense method to claim this deduction.
If this applies to you, include your car payment when tallying up the annual cost of operating your business vehicle. Then, calculate what percentage of your total annual miles were business miles. This percentage represents the total potential deduction you could claim on all of your eligible car expenses.
Yes, but only if you use the actual expense method. Also, just like in the case above, you can only claim the business-related portion of your lease payments. In other words, you must calculate what percentage of your annual miles you drove for business. This percentage is the potential deduction you can claim on your combined car expenses.
If you use the actual expense method, you can write off your car insurance. The same rules as above apply here.
