Claiming Cars on Taxes: When Vehicles Qualify for Deductions

Don’t let the price of your new car take away from the excitement of your purchase. Did you know you can write off some of your business vehicle expenses? 

Business owners and self-employed individuals can take business tax deductions for buying a new car. Personal-use vehicles can also generate tax write-offs on individual income tax returns. 

This article will summarize the vehicle tax deductions available to businesses and individuals. We’ll help you maximize your deductions from your new car.

Can You Write off Your New Car on Your Tax Return? 

Taxpayers cannot take a write-off for the full price of a new vehicle, but the IRS allows businesses and individuals to deduct several vehicle costs. Your auto expense deductions depend on how you use the car.

Business owners can generally write off the business-related depreciation expense, mileage, registration fees, parking, and tolls. 

Individuals can also claim tax deductions on personal-use vehicles. Taxpayers who itemize deductions can include certain sales and property taxes paid for the car.

Vehicle-related tax deductions depend on several factors, which we’ll explain below.

Tax Deductions for Business Vehicles 

Business owners can write off certain business-related vehicle costs. The IRS allows tax deductions based on the vehicle’s business use percentage each year.

Your company must report business-related vehicle expenses on its federal tax return. Your return form depends on your business entity type:

• Sole proprietorships and single-member LLCs filing Form IRS 1040 must use Schedule C, Profit or Loss from Business (Sole Proprietorship).

• Corporations filing IRS Form 1120 or IRS 1120S must report business-related car expenses on their business tax returns. 

Need help determining which form you should file? 1-800Accountant can help you calculate and report your auto expense deductions. Consult professionals for accurate, timely tax return compliance.

Vehicle Depreciation and Section 179 Deductions

Taxpayers cannot write off the total price of a business car in the first year. Instead, the IRS allows vehicle depreciation deductions over six tax years. 

Your annual depreciation expense deduction represents a percentage of your vehicle’s depreciable basis. Your small business can determine the vehicle’s depreciable basis by totaling the purchase price, registration fees, and sales taxes paid.

Your company must use your vehicle at least 50% for business purposes to qualify for depreciation expense deductions.

Depreciation Methods

Business owners can use one of the following methods to calculate depreciation expense. Your calculation depends on whether you use the standard mileage rate vs. the actual expense deduction method (explained later). 

• Straight-line depreciation generates equal deductions each year. Standard mileage method taxpayers must follow straight-line depreciation.

• Modified Accelerated Cost Recovery System (MACRS) 150% declining balance depreciation generates larger deductions in earlier years and smaller deductions in later years. Actual expense method taxpayers must use MACRS.

• MACRS 200% declining balance depreciation generates the largest deductions in earlier years and the smallest deductions in later years. Actual expense method taxpayers must use MACRS.

IRS Publication 463, Travel, Gift, and Car Expenses, includes detailed instructions for calculating the depreciation expense deduction on business vehicles. If you use your company car for personal purposes, apply your business-use percentage to your depreciation deduction.

Depreciation terms and calculations can be complicated. 1-800Accountant can take the complexity off your plate and help you determine your depreciation expense.

Section 179 Deduction for Business Vehicles

Section 179 represents an optional one-time deduction on qualifying depreciable property. Business owners can deduct Section 179 in the first year of an asset’s use.

Taxpayers must reduce their vehicle’s depreciable basis by the Section 179 deduction.

The IRS limits Section 179 deductions for sport utility vehicles (SUVs). The 2024 Section 179 limit on SUVs is $30,500.

Special Depreciation Deduction

In addition to the depreciation expense and Section 179 deductions, the IRS allows businesses to take a special depreciation deduction (also known as bonus depreciation). 

Taxpayers may deduct special depreciation on qualified assets placed in service during 2024. The bonus depreciation percentage depends on the placed-in-service date.

Like the Section 179 deduction, special depreciation reduces the vehicle’s depreciable basis.

The IRS limits the combined total depreciation expense, Section 179, and bonus depreciation deductions. We recommend consulting tax professionals for help with complicated calculations. 

Standard Mileage Rate vs. Actual Expenses Method

The IRS allows businesses to choose a method of calculating vehicle tax write-offs. Taxpayers can determine their business-related vehicle expenses using one of the following:

• Standard mileage rate

• Actual expenses

IRS Tax Topic 510 and IRS Publication 463 include detailed instructions for each approach.

Standard Mileage Rate Method

The standard mileage rate method allows business owners to claim a tax deduction for the number of business miles driven during the year. 

Certain restrictions apply. For example, taxpayers must use straight-line depreciation and cannot take the Section 179 deduction, special depreciation allowance, or deductions for lease payments.

Business Mileage Deduction

The 2024 standard mileage rate (starting January 1st, 2024) is 67 cents per business mile driven. The IRS implemented the following mileage rates for other purposes: 

• Charities: 14 cents per mile

• Military (moving only) or medical: 21 cents per mile

The IRS updates the standard mileage deductions annually.

Actual Expense Method

The actual expense method allows business owners to deduct the vehicle’s business-related operating costs. Eligible business expenses include repairs, maintenance, gas, insurance, lease payments, and registration fees.

The actual expense method requires taxpayers to use MACRS depreciation expense.

If you use your motor vehicle solely for business purposes (not for personal use), your business can deduct all related operating expenses. However, if you or your employees use the car for personal transportation, you must calculate the vehicle’s business use percentage. 

Tax professionals can help you calculate the correct business-use percentage for vehicle expense deductions.

Actual Expense Method: Other Deductions

Taxpayers deducting actual expenses (not using the standard mileage deduction) can claim the following business-related vehicle costs:

• Fuel costs

• Repairs and maintenance

• Garage rent

• Insurance and licenses

• Annual registration fees

Expenses for personal use generally represent nondeductible costs. 1-800Accountant can help you track your expenses and maximize your business tax deductions.

Operational and Vehicle Purchase Costs

Taxpayers can deduct several additional business-related vehicle costs. Business owners can claim the following deductions using the standard mileage or actual expenses deduction method.

• State and local personal property taxes on business vehicle purchases

• Business-related interest expense on car loans

• Parking fees and tolls incurred during business-related travel

Tax Deductions When Buying a Car for Personal Use

The IRS offers two deduction options on the Federal Form 1040:

• Take the standard deduction. 2024 standard deduction amounts vary by filing status.

• Itemize deductions on IRS Form 1040, Schedule A, Itemized Deductions. Calculate and write off medical expenses, taxes paid, charitable contributions, and other deductions.

Taxpayers itemizing deductions on Schedule A can write off certain vehicle costs, such as registration fees, sales taxes, and personal property taxes paid.

Personal Property and Sales Tax Deductions

Taxpayers can deduct personal property taxes and vehicle sales taxes on Form 1040, Schedule A. Retain your dealership purchase documents with the following information:

• Personal property taxes

• State and local sales taxes

• Registration fees 

If you plan to use your vehicle for business purposes at least 50% of the time, report the business portion of the taxes on your business tax return. Business owners can deduct up to $10,000 of state and local taxes on their personal income tax returns.

Buying a Car for Mixed Use (Personal + Business)

Purchasing a car for both business and personal purposes requires additional calculations. Consider the following example for a self-employed entrepreneur working in the rideshare industry. 

The business owner purchased a new vehicle in 2024 and used the car for both business and personal purposes. 

• The business owner traveled 20,000 miles in 2024:

  • 16,000 miles represented rideshare mileage.

  • 4,000 miles were for personal travel and errands.

• 16,000 business miles / 20,000 total miles = 80% business-related vehicle use.

The business owner must apply the business use percentage to all vehicle expenses. For example, the driver would determine their deduction for car repairs by multiplying the total repair cost by 80%.

Tax Credits for Buying an Electric Vehicle

The IRS offers a tax credit of up to $7,500 for certain electric vehicle purchases. Individuals can claim credits for personal or business vehicles. Review the IRS eligibility requirements or talk to your tax advisor to determine whether your plug-in vehicle qualifies. 

I Bought a Car – Help Me Claim It on My Taxes

You can lower your tax bill by writing off some of your new car costs. Now that you know you can enjoy vehicle tax deductions, consider working with tax experts to help you make the most of your purchase. 

Consult with accounting professionals for help calculating your business and personal-use vehicle tax write-offs. 1-800Accountant can help you maximize your deductions and lower your tax bill. 1-800Accountant’s tax professionals offer year-round advisory, business tax return preparation, and individual income tax filing support. Schedule a free call to learn about specialized services to support your tax compliance.