Can I Deduct the Purchase of a Vehicle For My Business?
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Summary:
Yes, business owners and self-employed individuals can file tax deductions for expenses related to the purchase and operational maintenance of business vehicles. That includes deducting the purchase of a vehicle via Section 179. You can also deduct expenses for vehicles you use for personal reasons if you mean certain requirements.
These days, vehicles are essential for many, if not all, businesses. For instance, if you own a landscaping business, you probably need to transport equipment with a pickup truck constantly. If you’re an Uber driver, your main business revolves around driving people from one place to another, and thus, the entire business is based on a vehicle.
The good news is the IRS is very aware of how crucial vehicles are for business and allows you to deduct the purchase of a business vehicle (and the running expenses). As you would expect, there are plenty of requirements and regulations to meet, but the paperwork is definitely worth the savings. Here’s what you need to know.
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Understanding Section 179
Section 179 of the IRS code allows filers to deduct any taxable income gained using their vehicles if the car or truck was used for business purposes. Even if you don’t use your car for business purposes 100% of the time, you can still deduct taxes from the portion of your vehicle that you use for business by establishing a “business use percentage.”
However, there are limits and requirements for how much you can claim per year and if your vehicle truly qualifies for a tax deduction. In this article, we’ll walk you through Section 179’s vehicle deductions and discuss how to calculate yearly vehicle expenses so you can take advantage of the tax deductions that the IRS offers.
Before Section 179 was written into law in 1958, business owners would deduct taxes for spending on business assets using straight-line depreciation. This meant that if a business owner invested $100,000 a year, for instance, they could write off $20,000 per year using a straight-line depreciation formula.
To encourage business owners to invest more heavily in growing their businesses, the IRS developed Section 179. This section allowed appropriate filers to write off the whole (or nearly whole) purchase price on qualifying business equipment for the current tax year.
How to deduct the purchase of a business vehicle
There are various portions of the vehicle acquisition that you can write off if it’s used for business purposes, including purchase price, lease payments, financing, actual car expenses (gas, etc.), and sales tax. If you’re a qualified business owner or self-employed individual, use Form 4562.
Section 179 requirements
To deduct your vehicle expenses under Section 179, both your business and the business vehicle must meet the following requirements.
| Business | Vehicle |
|---|---|
| • Investment in business-related assets cannot exceed $2,700,000 | • Weighs less than 6,000 lb. to be considered a light vehicle |
| • Deduction limit of $1,080,000 for all business-related assets | • Weighs between 6,000 and 14,000 lb. to be considered a heavy vehicle |
| • Used for business at least 50% of the time | |
| • Must be within the vehicle-specific deduction limits the IRS provides |
Full deduction vs. partial deduction
The IRS allows for 100% deductions for vehicles used for 100% business purposes, as well as partial deductions for vehicles that are only partially used for business. Most of the time, this is calculated by mileage. So if you sometimes (but not always) drive an Uber, you’re mixing your vehicle with both personal and business usage.
Example:
For instance, consider Giovanni the Uber driver. If Giovanni drives 15,000 miles in one year — 10,000 miles for Uber and 5,000 miles for personal usage — you simply divide the work mileage (10,000) by the total mileage (15,000). This means that Giovanni can deduct up to 67% of his entire vehicle cost, as the remaining 33% is used for his personal use.
This means if Giovanni purchased a car for $10,000 to drive for Uber, for example, and used it 67% of the time, he can claim $6,700 (67%) in deductions.
Full deduction requirements
There are certain vehicles that the IRS will always deem to be “work only.” These are the following:
- Vehicles that can seat 9+ passengers behind the driver’s seat (shuttles, small buses, etc.)
- Vehicles with a fully enclosed drivers compartment/cargo area
- No seating at all behind the driver’s seat
- No body section protruding for more than 30 inches ahead of the leading edge of the windshield
- Heavy construction equipment (forklifts, tractors)
- Over-the-road equipment (boat trailers, tractor trailers, etc.)
The IRS expanded these requirements in 2018 that filers must meet in order to receive the full 100% deduction. They are as follows:
- The taxpayer or its predecessor didn’t use the property at any time before acquiring it.
- The taxpayer didn’t acquire the property from a related party.
- The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
- The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
- The taxpayer’s basis of the used property is not figured under the provision for deciding the basis of property acquired from a decedent.
- Also, the cost of the used property eligible for bonus depreciation doesn’t include the basis of property determined by reference to the basis of other property held at any time by the taxpayer (for example, in a like-kind exchange or involuntary conversion).
As long as these requirements are met, you should be able to qualify for a 100% business vehicle deduction under the IRS Tax Code.
Using 179 and bonus depreciation
The bonus depreciation deduction allows businesses to deduct a large portion of the purchase price for eligible assets, such as vehicles. Whereas you can use Section 179 to apply for deductions throughout the lifespan of the vehicle for things such as financing costs and operational costs, bonus depreciation is typically only used the first year when you write off the expense of the vehicle.
| Vehicle Deduction Limits | ||
|---|---|---|
| Light vehicles | Heavy vehicles | |
| 1st year | $18,200* | $27,000 |
| 2nd year | $16,400 | $16,400 |
| 3rd year | $9,800 | $9,800 |
| 4th year and after | $5,860 | $5,860 |
| *Calculated by $10,200 standard + $8,000 bonus depreciation. |
Pro Tip
When calculating taxes, heavy vehicles such as SUVs are not applicable for the further bonus appreciation deduction. Furthermore, it’s important to note that the 100% bonus depreciation has only been in effect since 2018, and the current law expires in 2023. It’s expected that this percentage may go lower in 2023 and onwards, so be aware.
Ongoing expenses for maintenance and how to deduct
Most eligible filers use the deduction for their vehicle’s purchase price during the first year. After that, there are various other expenses related to the purchase that you can claim as business-related expenses, such as financing or upkeep of a car.
Interest on loan
If you didn’t buy the vehicle outright but instead used financing, you can deduct the interest paid on the vehicle. Remember, if you’re using the car for part personal and part business, you can only deduct taxes based on the percentage you used for business.
We can use Giovanni, the Uber driver, in this example. Giovanni racks up $4,000 a year in interest on his car payment, but as he only uses it for business 67% of the time, he can only claim $2,680 in expenses.
Looking to get great rates on an auto loan that you can also write off on your taxes? Here are some great options below.
Sales tax
Deducting car sales tax is another way you can alleviate the purchase price burden when investing in a vehicle for your business. Using IRS’s resources, you can also deduct sales and other state taxes using Schedule C of Form 1040.
Calculating operational and maintenance expenses
Throughout the lifetime use of your vehicle, you can claim tax deductions based on the costs of operating it. There are two different ways to do this, either by “actual expenses” or by mileage.
Deducting using the “actual expense method”
Actual expenses refer to, well, the actual expenses involved in purchasing and maintaining your business vehicle. Deducting actual car expenses starts with calculating the total amount of money that you spend on using and maintaining the car every year. These can include the following:
- Gas
- Oil changes
- Tire rotations
- Insurance
- Various maintenance
Here is an example of what a full deduction claim would look like vs. Giovanni the Uber driver.
| Standard | Giovanni (67%) | |
|---|---|---|
| Gas | $800 | $536 |
| Oil changes | $100 | $67 |
| General maintenance | $650 | $436 |
| Tire rotation | $150 | $101 |
| Insurance | $2,000 | $1,340 |
| Total | $3,700 | $2,479 |
As you can see, using the actual expenses method, you can claim all of the expenses for deductions. As Giovanni only uses his car 67% of the time, he can only claim 67% of the incurred expenses.
Deducting based on standard mileage rate method
For those who can’t keep track of expenses or don’t want to waste time doing it, mileage on the vehicle is another way to calculate operational or maintenance expenses. Part of this calculation is the IRS’s standard mileage rate, which offers a certain price deduction based on the number of miles driven.
| IRS Standard Mileage Rates | |||
|---|---|---|---|
| Year | Business | Charity | Medical moving |
| 2022 | 58.5¢ | 14¢ | 18¢ |
| 2021 | 56¢ | 14¢ | 16¢ |
| 2020 | 57.5¢ | 14¢ | 17¢ |
| 2019 | 58¢ | 14¢ | 20¢ |
| 2018 | 54.5¢ | 14¢ | 18¢ |
| 2017 | 53.5¢ | 14¢ | 17¢ |
| 2016 | 54¢ | 14¢ | 19¢ |
| 2015 | 57.5¢ | 14¢ | 23¢ |
| 2014 | 56¢ | 14¢ | 23.5¢ |
| 2013 | 56.5¢ | 14¢ | 24¢ |
| 2012 | 55.5¢ | 14¢ | 23¢ |
| *Rates are listed in cents per mile. |
For example, the IRS usually gives a deduction based on miles every year. As this changes on a yearly basis, for exemplary purposes, we’ll use a “theoretical, but close to the actual amount” of $0.60 USD per mile to be used as the deduction.
Let’s say you drive 5,000 miles in the tax year for business purposes. To determine what business mileage you could deduct, simply multiply the $0.60 by the number of business miles you drove (5,000). This comes out to $3,000, meaning you could claim $3,000 in deductible expenses.
FAQs
Can I write off my car payment?
You cannot write off the entire monthly car payment as a business expense. This assumes you’re talking about buying a car through a loan and not leasing it. However, you can write off the interest on the loan you are paying back.
Are car repairs tax deductible?
Yes, as car repairs are operations expenses, they are deductible on a yearly basis as long as they are within the deduction limit.
Can you write off a vehicle purchase?
You can write off a significant amount of the purchase price, and maybe even the entire purchase price, as long as it falls within the tax deduction limits. For a car or light vehicle, it would need to be under $18,200 ($10,200 + $8,000 bonus depreciation) based on 2022 laws. For a heavy vehicle like an SUV, you can write off up to $27,000 in the first year.
Key Takeaways
- A business owner or self-employed individual who uses a vehicle for business purposes can deduct certain expenses using the business vehicle tax deduction. This is commonly used in conjunction with IRS Section 179.
- A vehicle used for business qualifies for 100% of available deductions under Section 179. However, a business owner who uses a vehicle only part of the time for business must claim their tax deductions based on the percentage of time their vehicle is used for business.
- Section 179 deductions can be utilized with bonus depreciation to help write off the purchasing costs of a vehicle used for business.
- Vehicle sales tax, interest on auto loans, and operational expenses through the lifetime of the vehicle can also be written off.
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