Any business owner with their own business vehicle knows how important it is to make sure the numbers are done right—and come tax time, that includes writing off your business assets to reap the tax benefits. 🚚
It’s no secret that’s easier said than done. Like pretty much all other categories of our beloved tax code, the Internal Revenue Service (IRS) has created a list of stipulations for taking deductions or tax credits relating to your business vehicle.
Here are the different ways to deduct vehicle expenses for your business, a peek into the Section 179 deduction, and more.
Two ways to deduct business vehicle expenses
In general, you can claim business vehicle write-offs in one of two ways:
- Standard mileage rate method: A set business vehicle tax deduction per business mile that you drive specifically for business purposes. The standard business mileage rate for the second half of tax year 2022 is 62.5 cents per mile. This is intended to factor in the entire cost of the vehicle for you.
- Actual expense method: Instead of deducting by mileage, you deduct itemized expenses such as down payments, lease or loan car payments, regular maintenance, fuel costs, and more. 🧾
When writing off a qualifying vehicle for business, you can deduct either the standard mileage rate or actual expenses, but not both. If you need to guarantee you’re getting the best deduction possible, it’s a good idea to calculate your estimated mileage and expenses, comparing the business vehicle tax deductions to ensure you’re claiming the right one to shave the most off your taxable income.
IRS Section 179 directs how you write off business vehicle purchases
Thanks to IRS Tax Code Section 179, small business owners and others may deduct the full purchase price of any qualifying software and equipment purchases in the year that they purchase it. 💯
This tax provision helps businesses making big purchases increase their cash flow and account for the special depreciation period (vehicles depreciate most in the first year). Deducting the purchase price on your taxes before you pay off the loan can be a huge help.
Most work vehicles that can’t easily double for personal purposes, such as hearses, trailers, and forklifts are eligible for the Section 179 deduction. Some others may also be eligible (more on that below!).
Using the Section 179 deduction, a sole proprietor, LLC, or corporation can deduct the full purchase price of a financed vehicle that’s used for business purposes.
The maximum Section 179 deduction limit for the 2022 tax year is $1,080,000. This starts to phase out once the vehicle’s value exceeds $2,700,000.
There is a Section 179 business vehicle tax deduction weight threshold. This goes by your vehicle’s gross vehicle weight rating (GVWR). Any vehicles below 6,000 pounds are considered passenger vehicles, which are ineligible for the Section 179 deduction (first-year depreciation limits let you write off a maximum of $11,200, plus another bonus depreciation of up to $8,000).
SUVs between 6,000 and 14,000 pounds are eligible for a Section 179 deduction of up to $26,200—a lower limit than larger vehicles, but a decent chunk nonetheless.
Pro tip: You don’t have to forego deducting other pricey car expenses in order to deduct the purchase price. You can claim the Section 179 depreciation deduction and the vehicle’s actual expenses in the first year it’s placed into service for your business (but you cannot claim Section 179 and the standard mileage deduction in the same year).
If your business vehicle is ineligible for Section 179, consider reaching out to someone you know to help you finance the car at a low interest rate with favorable loan terms. Pigeon is a loan platform for friends and family that provides official loan contracts and even sends automatic payment reminders, making the process hands-off and stress-free.
Approved business use of vehicles for tax deductions
What vehicles and expenses are tax deductible for your business? For the Section 179 depreciation deduction, there are restrictions on type of vehicle by weight and purpose. If you’re just deducting the standard mileage or actual expenses, it’s more about how you use your vehicle (as long as it’s not a luxury ride, it doesn’t really matter what kind of car you use as a tax write-off).
The approved business purposes for writing off expenses on your taxes include:
- Gas and oil for commuting for business purposes
- Maintenance and repairs (including tires) for vehicles used largely for business purposes
- Registration fees and taxes (if you take the standard mileage deduction, you can still claim this)
- Licenses and insurance
- Vehicle loan interest (if you take the standard mileage deduction, you can still claim this)
- Rental or lease payments
- Garage rent
- Tolls and parking fees for business travel (if you take the standard mileage deduction, you can still claim this)
What is a business-use percentage and how do you find out yours? A business-use percentage is the percentage of vehicle use reserved for your business. This is applicable to anyone using a personal-use vehicle for business purposes.
If your sleek daily-driver Hummer’s cargo area is doubling as a work truck on the weekends, your business-use percentage tells you what portion of vehicle expenses you can deduct for your business. You can find yours by multiplying your total vehicle expenses by the percentage of business miles driven (of your total mileage).
What if you’re self-employed? If you fill out a Schedule C as an independent worker, you can still deduct any vehicle expenses you or your employee(s) incur. If you need help covering upfront costs, consider low-interest loan options like a friends and family loan through the Pigeon platform. 💡
Electric vehicle tax credit available for your business
Did you know? A tax deduction reduces your taxable income, but a tax credit lowers your taxes owed. Tax credits are often nonrefundable, meaning if you don’t owe any taxes, you don’t get a reimbursement from the IRS.
If you’re interested in going green, you may be happy to hear that an electric vehicle (EV) tax credit is available for taxpayers who purchase an EV for their business. 🔌 Trim your tax liability by $7,500–$40,000, depending on the type of business vehicle and how many emissions you’re saving by going electric. Larger pickups, trucks, and trailers are eligible for a bigger tax credit than smaller cargo vans, crossovers, SUVs, and passenger cars.
Ready to write off a business vehicle the right way?
Filling out a tax return as a business professional involves a lot of nuance, which is why it makes sense for you to consult with a tax professional before making any moves. However, knowing the basics of writing off new or used vehicle expenses according to U.S. tax code puts you in the driver’s seat and boosts your tax savings.
Whatever your business, from sole proprietorship to medium-sized operation, reducing your business tax liability with business vehicle deductions and credits can make a massive difference—improving your cash flow, opening up growth opportunities, and, ultimately, fast-tracking your success. 🏎️
Want to read more related content? Check out some more of our awesome educational pieces below:
