Great news if you’re a business owner or self-employed and use your own vehicle for your work. You could deduct your car’s expenses, and maybe even the purchase price if it’s low enough, when filing your taxes, and that could boost your refund or reduce the taxes you owe. But there are several qualifying conditions to be able to do this. Keep reading to learn more about deducting car expenses on your tax return.
Who can deduct car expenses?
For tax years 2018-2025, you can deduct car expenses only if you are self-employed as a contractor (freelancer, or gig-worker), or you are a business owner. The IRS updates federal tax laws constantly, so it’s a good idea to check every year.
If you use your own vehicle for both business and personal reasons, you must keep track of your car expenses, and deduct only the portion used for work. If this is how you use your vehicle, your deduction for your car is based on the business percentage of mileage used for self-employment.
If you’re an employee who receives a W-2, you may not qualify for vehicle expense deductions until after 2025.
How do I deduct car expenses?
It depends. If you’re a business owner, or self-employed, you can deduct your business-related car expenses using a Schedule C (Form 1040) Profit or Loss from Business. If you’re a farmer, you can use a Schedule F (Form 1040) Profit or Loss from Farming to deduct your farming-related vehicle expenses.
How do I calculate the business percentage of a car?
If you’re self-employed and use your own car for work, one way to calculate these expenses is to total all your car-related expenses listed below and multiply that number by the percentage of total miles you drove for business only.
Qualifying car expense deductions
- Gas
- Repairs, including new tires
- Car insurance
- Limited depreciation or leasing fees
- Section 179 deduction (explained below)
- Tolls
- Parking
- Maintenance fees
- Registration fees
- Garage fees
- Interest portion of car payments
- Lease payments
Example
Let's say you use your car 60% of the time for business and have $3,000 worth of car expenses. Multiply $3,000 by 60%, to get $1,800 worth of deductions.
What is a “luxury car” or “automobile” for IRS purposes?
The IRS uses the term “luxury car” when referring to an “automobile.” To qualify for a deduction, your vehicle must have four wheels, be mostly used on public roads, and have an unloaded weight of no more than 6,000 pounds (3 tons), regardless of purchase price.
How do you buy a car and write it off?
Be sure to keep records of your start-of-year mileage and end-of-year mileage. You could write off all or some of your original purchase price after the first year, using the Section 179 deduction. This special deduction is an IRS Tax Code section that allows business owners to write off the allowed purchase price of your car in the year it was purchased or financed. Section 179 deduction is limited to heavy-duty SUVs, with a gross vehicle weight between 6,000 and 14,000 pounds, and the allowed deduction is limited to the smaller of the purchase price or the business percentage of up to $28,900 in 2023. The amount eligible for Section 179 can increase, based on the annual inflationary adjustment by the IRS.
What cars can you write off?
Section 179 allows business owners or those who are self-employed, to “write off”—or take a tax deduction—for part of the cost of your vehicle the first year you start using your vehicle for your business.
Section 179 covers many types of property as a deductible expense for business, but not all vehicles qualify. The IRS breaks down qualifying vehicles into three categories. Basically, the heavier the vehicle, the more you can deduct.
- Light Section 179 vehicles. This is a vehicle with the manufacturer’s gross vehicle weight rating (GVWR) listed at under 6,000 pounds (3 tons). This includes most passenger cars, crossover SUVs, and small utility trucks. You cannot take a Section 179 deduction.
- Heavy Section 179 vehicles. This is a vehicle that weighs over 6,000 pounds, but under 14,000 pounds (7 tons). The deduction allowed is the percentage of business use and up to $28,900 of the purchase price.
- Other Section 179 vehicles. Any vehicle that weighs over 14,000 pounds, or one that has been modified for non-personal use, such as shuttle buses (having more than 9 passengers behind the driver), delivery vans with a large interior cargo space, ambulances, and hearses. These vehicles are allowed a full Section 179 deduction, based on the purchase price and any additional expenses or improvements.
How do I write off a 6,000-pound car?
If your vehicle still weighs less than 14,000 pounds, you could receive a maximum first-year deduction of up to $27,000 for 2022 taxes, and up to $28,900 for 2023 taxes. After that, you will follow a vehicle specific depreciation (a car’s loss of value over time and usage) schedule for deducting any remaining cost of your vehicle. The tax code further limits your deduction to the business use of your vehicle each year. Very few Schedule C small businesses have a car that is used 100% for business. If you’re splitting your car between personal and business, you must keep track of mileage for the year and for business specifically, so you can determine the business percentage.
Taxes for business and their assets, including vehicles, can be very complicated, but your local Tax Pro can help you with this now and when you’re ready to file your taxes.
Can expensing your car for business taxes pay the car off entirely?
No, writing-off a vehicle does not pay the car off, especially considering the type of financing or loan you’re committed to. However, you could write off part of the purchase price of your vehicle, starting with the first year you use it for business purposes, as a deduction on your taxes. This deduction is commonly known as “depreciation,” and is limited based on the size (GVWR) of the car and the percentage of business use.
What is the Section 179 deduction limit for 2022, 2023 tax returns?
The Section 179 deduction is part of the depreciation system used in income taxes. Section 179 is a way to write of part of the allowable basis (generally the purchase price) of a business asset, something owned by a business such as a car or machine. The maximum Section 179 deduction for taxpayers across all businesses is limited to $1,080,000.00 for taxes beginning in 2022. The maximum Section 179 deduction for tax years beginning in 2023 increases to $1,160,000.00.
What vehicles qualify for the Section 179 deduction?
New vehicles, or simply new to you, used more than 50% of the time can be used for the Section 179 deduction in both 2022 and 2023 during their first year of use.
Taxes can be complicated to fully understand. That’s why we’re here! Our Tax Pros make taxes look easy, so that you can focus on getting your biggest refund while we do the hard work for you. Speak with one of our tax professionals today about deductions for your vehicle, and more tax benefits that can help you and your business expenses.
