Writing off a Car for Business: IRS Rules

As a business owner, you know full well the various costs of running your business. For businesses that rely on transportation for delivering their goods and services, one of the most significant costs is the use of a vehicle. 

Fortunately, businesses can claim the cost of their car with the IRS and reduce their taxable income. In other words, they can "write off" their vehicle. 

In this article, we go in-depth on writing off your car using three popular methods for deducting auto expenses: the Section 179 deduction and deducting mileage via the standard mileage or actual expense method. 

You'll have all the foundational information you need to make informed decisions about your tax plan with your trusted tax professional.

How the Section 179 Vehicle Deduction Works

Section 179 is an IRS tax code that lets you deduct the entire cost of new and used equipment and software for the tax year you started using it. You would do this instead of spreading (or depreciating) the cost over several years. 

Usually, you would spread the deduction across the asset's useful life as it's used. But Section 179 lets businesses claim depreciation much faster, even all at once, if their claim is under annual caps.

Businesses do this to improve their cash flow. That big deduction all at once means more money is available to return to the business. Some companies will use the tax savings to pay down or eliminate the car loan, which reduces their liabilities. 

But, the rules regarding car deductions have limitations, which we cover below. You can also read our article covering the entire Section 179 Tax Deduction. 

How the Standard Mileage and Actual Expense Methods Work

The standard mileage rate provides a fixed deduction amount per mile, while the actual expense method awards a deduction based on the total expenses associated with the vehicle. 

These methods help small businesses space out the tax benefit, which can help regulate future tax bills. 

Please note that for both methods, vehicle expenses related to parking fees, tolls and interest can be claimed in addition to business mileage or actual expenses incurred. Detailed recordkeeping is crucial to getting the full benefit of your deductions.

Which Method is Best?

It can be hard to know whether Section 179, standard mileage, or the actual expense method is best, but let's review some general recommendations to help you decide. 

How Do I Write Off My Car On My Taxes? 

Writing off your car on your business taxes is a matter of choosing a deduction method and filling out the appropriate tax forms. If you want more guidance, here's a general overview of the steps to follow:

1. Decide on the deduction method you'll use. Section 179, standard mileage rate, or actual expenses method. (See our in-depth guide comparing each one further below.)
2. Keep accurate records of your car expenses, including gas, oil changes, repairs, and maintenance, if you use the actual expenses method.
3. Keep a log of your car usage, including the date, destination, and purpose of each trip, if you use the standard mileage rate method. Grab odometer readings from Jan. 1 through Dec. 31 to calculate total miles driven for the entire year, including business and personal use.‍
4. Calculate your deduction by multiplying the total mileage (used for business) for the year by the applicable standard mileage rate or by adding up all of your actual car expenses for the year.‍
5. File your taxes and claim the deduction on Schedule A (Form 1040) for personal use or Schedule C (Form 1040) for business use. See below for more specifics on claiming each type of deduction and the forms you'll need.‍
6. Be prepared to provide documentation to support your deduction in case of an audit. A mileage log in Google Sheets, Excel or your Calendar app can be useful on top of receipts for actual expenses.

IRS Forms for Writing Off Your Car

You may need a few IRS forms, depending on the type of deduction you plan to take. Here is a table to help you find the form for your business (and for personal taxes, if applicable). However, know that it's always a good idea to consult a tax professional. 

How to Take the 179 Vehicle Deduction

Your business will use Part I of Form 4562 to claim your depreciation. There, you'll list a description of your car, its value, and the deduction amount. As rules differ slightly between types of business entities (sole proprietors, s-corps, etc.), ensure you follow the rules set for your entity type. 

Avoiding Surprise Tax Bills with Section 179

If your car is no longer used primarily for business or you sell your car, you may find yourself with an additional income tax burden later. Claiming via Section 179 essentially reduces the value of your car to $0 on your books. Selling it lets you recoup some of the value you depreciated, which means you'll owe taxes on the sale of your car. 

The same idea applies to using the car primarily for personal use. Though no money exchanges hands, you're no longer using it for business-related purposes. In other words, the time, wear, and tear on the vehicle (what depreciates it) is no longer related to business use. That makes you retroactively ineligible for the tax break you took. 

Remember that the Section 179 deduction is for depreciation that hasn't happened yet. You're telling the IRS the car will depreciate for business purposes. So if the prediction doesn't hold, the IRS will reclaim any overpaid depreciation it awarded you on your next tax returns.

This is an everyday scenario, and no fine or penalty is attached to it. But it is understandably annoying and confusing. So if you're not entirely sure your vehicle will always be used primarily for business, it's best to choose a different method. 

How to Take the Standard Mileage Deduction

To take the standard mileage deduction, you must:

1. Determine if you are eligible. Some of the rules include not operating a fleet of cars or claiming Section 179.
2. Once you confirm your eligibility, keep track of the total miles you drive for business purposes throughout the year. 
3. At the end of the year, multiply the total business miles by the current standard mileage rate set by the IRS each year. 
4. Report your deduction on your tax return using either Schedule C (for self-employed individuals) or Form 2106 (for employees and only allowed in Alabama, Arkansas, California, Hawaii, Minnesota, New York and Pennsylvania).

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Be sure to keep detailed records of your business mileage, including each trip's dates, locations, and purpose. This information is necessary to support your deduction during an audit. Dozens of mobile apps can help you stay organized, but you can alternatively keep a simple log in your business vehicle. 

How to Take the Actual Expenses Deduction

To claim the actual expenses deduction, you must record all your auto expenses, including gas, oil, repairs, insurance, and depreciation. At tax time, you'll add up all of these expenses and deduct them from your taxable income. 

You cannot claim both the actual expenses deduction and the standard mileage deduction for the same vehicle, so it's important to carefully consider your options and choose the method that will give you the biggest tax benefit. 

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If you go with the actual expenses deduction, you have to use that for the life of the vehicle. You can't switch to mileage if it suddenly becomes advantageous.

Examples of the Three Deduction Methods

Suppose you purchase a new SUV that costs $53,350 and expect to drive 22,000 business miles in 2023 and no personal miles on it. Here's what your deduction could look like with each of these methods.

But remember that you can only use one deduction at a time and only deduct up to the cost of the vehicle. So in any of the scenarios, you'll hit the same deduction limit for the asset (your car), but you'll hit that limit at different times depending on how quickly you depreciate. 

Section 179

With Section 179, you can claim the cost of the car, truck, or van up to the annual cap (which is $28,900 for automobiles over 6,000 pounds in 2023). 

Your business's SUV cost was $53,350, and you use it for business 80 percent of the time. Eighty percent of the purchase price is $42,680.

$53,350 x 0.80 = $42,680

So you can deduct up to the cap, $28,900, for the year. Next year, you can deduct the remaining $13,780 of depreciation you can claim. 

$42,680 [deductible purchase price] - $28,900 [first-year deduction] = $13,780 [remaining depreciable amount]

After that, you've fully written off your car. 

Standard Mileage Deduction

The standard deduction for 2023 is 65.5 cents per mile, which allows you to deduct $14,410. 

22,000 [miles] x $0.655 = $14,410 

Actual Expense Deduction

Here's a year's worth of gas, depreciation, maintenance, repairs, and other costs that we'll use for this example. 

Now we have to adjust the total cost of the vehicle for its cost related to business use. We've established that the car's business-use percentage is 80%, so we multiply the total actual expense by 0.80.

$49,700 x 0.80 = $39,760

Which Method Gets the Bigger Deduction?

The business gets to write off the largest amount in year one using the Section 179 deduction. The next highest deduction came via the standard mileage deduction, and the actual expense method got the smallest first-year deduction overall. If you're looking to access your deduction faster, Section 179 will be the most likely way. 

But if you want to space your deduction out, you can still choose a smaller deduction now with either standard mileage or actual expense. 

Keep in mind that these calculations are based on estimated use. Many businesses keep track of mileage and car service (maintenance, repairs, etc.) and decide which deduction to use after the fact. A year of higher repair costs or fewer miles driven could make the actual deduction seem more advantageous. But once you use the actual deduction method, you're stuck with it over the lifetime of the vehicle, so mileage tends to work out better for people.

Which is Better: Section 179, Standard Mileage Deduction, or the Actual Expense Deduction?

It can be hard to know whether Section 179, standard mileage, or the actual expense method is best, but let’s review some general recommendations to help you decide.

What Else You Need to Know About the Section 179 Deduction

Here's a closer look at this type of deduction to see who qualifies, when not to use it, and more. 

How to Qualify for the Section 179 Deduction

Small businesses of all entity types, including sole proprietors, partnerships, limited liability companies (LLCs), S corporations, and C corporations, can qualify for the Section 179 deduction. The vehicle(s) must meet a few qualifications, including that it must:

• Be for business use, which means it's used for business purposes at least 50% of the time. Time spent commuting doesn't count towards business use. A personal vehicle (used more than 50% of the time for personal use) can still qualify for deductions, just not the Section 179 deduction. 
• Be purchased and put into service within the same calendar year, i.e., between January 1 and December 31. 
• Weigh less than 14,000 pounds.

Any vehicle can qualify if it meets the above conditions, including passenger cars, SUVs, vans, trucks, and even certain types of heavy equipment. 

Section 179 Deduction Limits for 2023

The 2023 limits depend on the gross vehicle weight rating (GVWR). For automobiles purchased and put into service in 2023 and weighing less than 6,000 pounds, businesses can deduct:

• $12,200 in the first year — $20,200 if you claim bonus depreciation
• $19,500 in the second year
• $11,700 in the third year
• $6,960 in subsequent years until the vehicle is fully depreciated

For vehicles purchased in 2023 and weighing more than 6,000 pounds (but less than 14,000 pounds), businesses can deduct $28,900 in the first year. After the first year, businesses follow the depreciation schedule outlined above until the vehicle is fully depreciated. 

There are two limitations to note: 

1. You can't deduct more than your net business income, but you can roll your unused deduction over into the next year. Your business income is your sales minus expenses like the cost of goods sold, general and administrative costs, and operating costs. 
2. You can use the deduction until the car is worth $0. If you can fully depreciate your car in year one, then you've fully written it off (and have nothing to deduct on future taxes). 

Bonus Depreciation and the Section 179 Deduction

For vehicles, bonus depreciation allows businesses to deduct a percentage of the cost of a new or used vehicle up to the limits for the year you started using it in your business. This could be different from the year you purchased the vehicle. 

If you started using the car for business before 2023, then you can deduct 100% of its cost. Afterward, there is a 20% drop each year until the bonus depreciation is fully phased out in 2027. So, if you started using your car in 2023, then you can deduct 80% of its cost.

Again, this only applies to vehicles used for business at least 50% of the time. 

What Else You Need to Know About Deducting Via Standard Mileage and Actual Expenses

If you're thinking about writing off your business car using the standard mileage or actual expense methods, here are some other things to know:

Deducting via the Standard Mileage Rate

The standard mileage rate method is a flat rate deduction based on the number of business miles driven. The 2023 mileage rate is $0.655 per mile, the IRS-determined rate to cover the average cost of owning (or leasing) and operating an automobile. There is no limit on the number of miles driven, so long as they're driven for business purposes. 

There are a few more scenarios where mileage is deductible: 

1. Miles driven for medical purposes (to and from chemotherapy, for example) can be deducted at a rate of $0.22 per mile in 2023.
2. Miles driven by Armed Forces members for relocation purposes can also be deducted at a rate of $0.22 per mile in 2023. 
3. Miles driven in service of an approved charitable organization can deduct $0.14 per mile in 2023. 

You'll need to track your miles driven to get the full benefit of your deduction. And you'll want to hold onto your records for at least seven years, just in case you're ever audited.  

Deducting via the Actual Expense Method

With the actual expense method, you deduct all the costs associated with using your car for business, including:

• Fuel
• Maintenance (oil changes, tires, etc.)
• Repairs
• Car insurance
• Lease payments
• Depreciation (i.e., the loss of a vehicle's value over time)
• Title, licensing, and registration fees
• Parking fees and tolls

You'll need to log your actual expenses and keep a record of the related receipts. You'll also need to track your mileage for business and personal use. And you'll want to hold onto all those records for at least seven years. 

Use the Deduction Method that Best Meets Your Business Goals

Deciding which method is best for your business depends on your goals, needs, and budget. There is no one-size-fits-all when it comes to writing off a car. The best method depends on your goals and budget and what kind of vehicle you bought, how you bought it, and what you're using it for. How you structure your business may also affect which method is most beneficial.

Your car also represents just one way to maximize your tax savings. But there are dozens of tax deductions you could be eligible for. This is why working with a tax advisor to create a tax strategy for your business is so valuable. Whatever strategy you land on, detailed recordkeeping is paramount. 

FAQs

What are the tax rules for a car donation?

To deduct your car donation, you must the following tax rules.

1. First, ensure you donate it to a qualified organization, such as a 501(c)(3). You can verify that the recipient qualifies via the tax-exempt organization search on the IRS website. 
2. The car donated must also meet qualifications. It's a low bar; basically, any average passenger car, truck, boat, and even airplane will qualify, so long as it's not inventory at a dealership. 
3. You'll also need a written acknowledgment of the donation and its value. The qualified charity should provide you with a Form 1098-C to make things easier.  

Finally, you must itemize your deduction on Schedule A of Form 1040. You can read more about car donation rules in the IRS's A Donor's Guide to Vehicle Donation.

Can self-employed people qualify for the Section 179 Deduction?

Yes. So long as the business vehicle meets all other requirements (weight, purchase date, and initial use date), self-employed people can use Section 179 to reduce their taxable income. 

But remember that other tax write-offs could be more advantageous in the long run. For example, a business owner who uses a car a little over half the time for work may run the risk of driving the car for personal use more in the future. 

That's not a bad thing, but if that same business owner took the Section 179 deduction, they'd be subject to the messy process of "recapture." That's where the IRS recuperates overpaid depreciation deductions.