What cars can be written off as business expenses

If you use your car only for business purposes, you may deduct its entire cost of ownership and operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.

You can generally figure the amount of your deductible car expense by using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, you may want to figure your deduction both ways before choosing a method to see which one gives you a larger deduction.

Standard Mileage Rate - For the current standard mileage rate, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses or search standard mileage rates on IRS.gov. To use the standard mileage rate, you must own or lease the car and:

• You must not operate five or more cars at the same time, as in a fleet operation,
• You must not have claimed a depreciation deduction for the car using any method other than straight-line,
• You must not have claimed a Section 179 deduction on the car,
• You must not have claimed the special depreciation allowance on the car, and
• You must not have claimed actual expenses after 1997 for a car you lease.

To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.

For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate.

Actual Expenses - To use the actual expense method, you must determine what it actually costs to operate the car for the portion of the overall use of the car that's business use. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.

Note: Other car expenses for parking fees and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.

Depreciation

Generally, the Modified Accelerated Cost Recovery System (MACRS) is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct. For additional information on the depreciation limits, please refer to Topic No. 704. Publication 463, Travel, Entertainment, Gift, and Car Expenses explains the depreciation limits and discusses special rules applicable to leased cars.

Recordkeeping

The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement. For further information on recordkeeping, refer to Topic No. 305.

Where to Deduct

Deduct your self-employed car expenses on:

• Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or
• Schedule F (Form 1040), Profit or Loss From Farming if you're a farmer.

If you're an Armed Forces reservist, a qualified performing artist, or a fee-basis state or local government official, complete Form 2106, Employee Business Expenses to figure the deductions for your car expenses.

You can write off part or all of the purchase price of a new or "new to you" car or truck for your business by taking a section 179 deduction. This special deduction allows you to deduct up to the entire cost of the vehicle in the first year you use it if you are using it primarily for business purposes. 

Key Takeaways

• Section 179 of the tax code lets you write off some or all of the purchase price of vehicle you buy for your business, provided you meet the requirements.
• In order to take the deduction, you must use the car for business more than 50% of the time, and you can only deduct the percentage that you use for work.
• The vehicle must meet certain requirements, such as weighing between 6,000 and 14,000 pounds.
• You can't write off the purchase price and claim the standard mileage deduction in the same year.
• You can't deduct more than your business's net income for the year.

How Section 179 Deductions Work

A section 179 deduction is a special kind of tax deduction that businesses can take to reduce expenses. You can elect to take this deduction on the cost of certain types of business property. including business vehicles, instead of (or in addition to) recovering the cost by depreciating the property (spreading out the cost over several years).

Section 179 Deductions Only for Employers

Most employees can no longer take a section 179 deduction for a business vehicle. This deduction was part of miscellaneous deductions on Schedule A, and these deductions have been suspended.

A few categories of employees, including Armed Forces reservists, qualifying performing artists, state or local government officials, or employees with impairment-related work expenses may still be able to take this deduction.

Qualifications for Section 179 Deductions

To qualify for a section 179 deduction for a business vehicle, it must be bought and put into service during the year in which you are applying for the section 179 deduction. Being placed in service means that a business asset is ready and available for specific use in a business or for the production of income.

In addition, the vehicle:

• Must be eligible property, including vehicles, machinery, furniture, and fixtures. Land and leased property are not eligible.
• Your company must buy it for business purposes.

The most important qualification for section 179 deduction purposes is business use. You can only take a section 179 deduction for vehicles used more than 50% of the time for business purposes. The deduction is limited to the amount of use and can't be taken on personal use.

Section 179 Deductions and Depreciation

Section 179 deductions work like depreciation. The purpose of depreciation is to spread the expense (and tax deductions) of owning a business asset like a car or truck over the life of that asset.

Normally, depreciation is deducted as an expense to the business over the life of the equipment or vehicle. But a section 179 deduction allows you to take more of the expense of the purchase in the first year.

Note

You may be able to combine a section 179 deduction with depreciation on a vehicle in a specific tax year. For example, a section 179 deduction can also be used with a depreciation method called bonus depreciation to save on taxes when you buy a business vehicle. But bonus depreciation allowances will be phased down beginning in 2023 and will be eliminated in 2026. Check with your tax professional for qualifications and limits on depreciation.

Limits on Section 179 Deductions

There are two limits on the amount you can elect to deduction under section 179.

Dollar Limits

The total amount you can take as section 179 deductions for most property (including vehicles) placed in service in a specific year can't be more than $1,080,000. In other words, all section 179 deductions for all business property for a year can't be greater than $1,080,000 for the 2022 tax year. The dollar amount is adjusted each year for inflation. There is also a "phase-out" limit of $2,700,000.

In addition to the general dollar limits, the maximum section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2022 is $27,000.

Note

The IRS specifies that the vehicle must be a "4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight."

Business Income Limit

After you apply the dollar limit, the total cost you can deduct each year—including section 179 deductions—is limited to the taxable income from your business during that year. In other words, you can't use a section 179 deduction to cause your business to have a loss. If you can't take all or part of a section 179 deduction in one year, you can carry it over to the next year.

The calculation for this limit is complicated and it's different for each business. See the instructions for IRS Publication 946 for more details.

How To Take the Deduction

You or your tax preparer will need to complete IRS Form 4562 Depreciation and Amortization. Follow the instructions for Part I.

Key Requirements and Restrictions

• The vehicle must be new or "new to you," meaning that you can buy a used vehicle if it is used first during the year you take the deduction.
• The vehicle may not be used for transporting people or property for hire. 
• You can't deduct more than the cost of the vehicle as a business expense.
• You must put the vehicle "into service" (use it in your business) by December 31 of the tax year. If you don't use it, you can't get the deduction, so make sure you can prove the vehicle was used in your business by the end of December, in case of a tax audit.
• You cannot deduct more than your business net income for the year.

Note

Some states have restrictions and additional limits on section 179 deductions. Check with your state's taxing authority for the details.

Frequently Asked Questions (FAQs)

How much of my car can I write off for business?

You can write off the whole cost of ownership and operation, within limits, if you only use the car for business purposes. If you use the car for both personal and business purposes, you can only deduct the cost of its business use.

What kinds of vehicles can you write off with Section 179?

Any four-wheeled vehicle designed to carry passengers, including cars, trucks, vans, and SUVs weighing between 6,000 and 14,000 pounds can qualify for at least a portion of Section 179.

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Sources

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1. IRS. "Publication 946 How to Depreciate Property." Sport Utility and Certain Other Vehicles. Page 18.