Many business owners invest in vehicles to expand their client base, improve brand recognition, and transport people and supplies.
Some of these vehicles may qualify as tax deductible under Section 179 of the IRS tax code, even if you drive them for personal reasons. This deduction depends on the vehicle and the percentage of time you drive it for your business, and there are several exceptions.
Find out if your work vehicle qualifies for a business vehicle tax deduction under Section 179 and how to calculate your savings.
Can You Write Off a Car Purchase or Lease as a Business Expense?
When people talk about the “SUV Tax Loophole” or the “Hummer Deduction,” they refer to IRS Tax Code Section 179. This section of the U.S. tax code permits businesses to write off specific qualifying property, including qualifying vehicles, as business tax deductions.
In most cases, if you buy or lease a vehicle and only use it for business purposes, you can deduct the entire cost of its operation and ownership. However, if you also operate the vehicle for personal use, you may only deduct expenses incurred when using it for business.
Standard Mileage Rate Vs. Actual Expenses
You can calculate the amount of your deductible car expense using either the actual expense method or the standard mileage rate method. Those who qualify for both methods may want to identify which yields the larger deduction.
Deducting Actual Car Expenses
To determine the vehicle’s actual expense, you must figure out how much it costs to operate your vehicle during business use. This may include gas, oil, insurance, repairs, tires, licenses, and lease payments.
Most often, parking and toll fees are deducted on separate forms (Form 2106, Employee Business Expenses) no matter which method you use to calculate your deduction.
Deducting Car Expenses Based on Mileage
You can use the standard mileage rate the IRS sets to determine your deduction based on miles driven in a purchased or leased vehicle. Mileage rates differ based on the vehicle’s purpose.
For example, in 2022, you can claim $0.58 per mile you drive a vehicle for business purposes but only $0.14 per mile driven for charity purposes.
You can only use the standard mileage rate if:
- You own or lease the car
- You do not operate more than five cars simultaneously (fleet operation)
- You have only claimed a deduction for the car using straight-line depreciation
- You have not claimed a Section 179 deduction
- You have not claimed the special depreciation allowance on the car
- You have not claimed any actual expenses after 1997
If you own the vehicle, you must choose the standard mileage rate the first year you use your car. After the first year, you can use either rate.
If you choose this option on a leased vehicle, you must use the standard mileage rate method for the full lease period, including renewals.
How Section 179 Deductions Work
In previous years, if a business wanted to write off qualifying equipment as a business expense, it had to be done over many years through depreciation. For instance, if a company spent $100,000 on a machine, using straight-line depreciation, it could write off $20,000 a year for five years.
Although better than no write-off, this method left many small and midsize businesses struggling to purchase necessary equipment for their companies due to a lack of investment capital.
To encourage owners to invest in equipment to grow their business, the IRS introduced Section 179 Deductions, which allow companies to write off the full purchase price of qualifying equipment for the current tax year.
Any business that purchases, finances, or leases business equipment in 2022 (spending less than $3,780,000) should qualify for this deduction. Qualifying purchases include tangible goods, off-the-shelf software, and business vehicles.
To qualify for the deduction, you must place your new equipment (or vehicle) into service between January 1, 2022, and December 31, 2022.
Do You Qualify for a Section 179 Deduction?
To determine if you qualify for a section 179 deduction, you will need to determine how often you use your vehicle for business and personal reasons.
If you use your vehicle for business reasons 100% of the time, your vehicle will qualify for a full Section 179 deduction.
This includes:
- Vehicles with 9+ passenger seats (such as Airport or Hotel shuttles)
- Heavy construction equipment, including forklifts
- Typical “over-the-road” Tractor Trailers
- Vehicles that meet the following 3 criteria:
- Fully-enclosed driver’s compartment
- No seating behind the driver’s seat
- No body section that protrudes more than 30 inches in front of the leading edge of the windshield
If you use your vehicle for business reasons for more than 50% of the time but less than 100% of the time, you may have a limited total deduction of $11,160 for cars and $11,560 for vans and trucks.
Exceptions to this rule include:
- Hearses or ambulances
- Transport vans, taxis, and other vehicles used to move people or property
- Certain non-personal use vehicles modified for your business (such as a work van with permanent interior shelving and the company’s logo)
- Certain heavy non-SUV trucks and other vehicles that have at least 6 feet of accessible cargo area (such as a pick-up truck with a full-sized cargo bed)
Deducting Vehicle Costs With Section 179
If you split your vehicle between personal and business uses, you can calculate your allowable deduction by multiplying the cost of the vehicle by the percentage of business use. You can identify the percentage of business use by tracking your miles.
For instance, you buy a vehicle for your business for $20,000. If in the first year you drive 6,000 miles for business and 4,000 miles for personal reasons (for a total of 10,000 miles), your percentage of business use is 60%.
($20,000) x (60%) = $12,000 would qualify for the Section 179 vehicle deduction.
Other considerations for business vehicle deductible:
- Vehicles with a gross weight rating between 6,000 lbs. and 14,000 lbs. qualify for deductions of up to $25,000, though precluding conditions may apply.
- Your vehicle must be financed with certain qualified leases and loans, titled in the company’s name (not your name), and acquired in an “arms-length” transaction.
- You must use your vehicle for business at least 50% of the time. If you use the vehicle for personal reasons, the depreciation limits are reduced by the percentage of time the vehicle is not used for business.
- You are only allowed to claim Section 179 in the tax year that your vehicle is ready and available for use (even if you do not use the vehicle yet).
If you have already used your vehicle for personal reasons, even if you now use it for your business, it will not qualify for a business tax vehicle deduction.
How Depreciation Works Under Section 179
Depreciation is a tax deduction that allows a business to write off portions of property or equipment it buys. When a company buys equipment, such as construction machinery, it makes a capital investment. This investment depreciates over time, meaning it loses some of its original value.
As a tax strategy, depreciation allows a business to write off the purchase of the asset over time. This approach also puts businesses in a better position when replacing equipment that no longer functions or phases out.
Under Section 179, you can take a tax deduction for qualified depreciation expenses related to tangible assets, such as equipment, machinery, vehicles, and some building fixtures.
For vehicles, the depreciation period is five years, while equipment depreciates over five to seven years.
Limits on Section 179 Deductions
The IRS imposes limits on Section 179 deductions for equipment costs. Recent changes increased the maximum deduction amounts and the phase-out threshold for those using Section 179 deductions.
Dollar Limits
In 2018, the IRS raised the dollar limits for deductions to a maximum of $1 million and a phase-out threshold of $2.5 million. The IRS adjusts these limits for inflation each year. Before these limit increases, businesses could only deduct a maximum of $500,000 and had a phase-out threshold of $1 million.
Current maximum deduction dollar limits for 2021 are $1,050,000 with a beginning phase-out of $2,620,000. The 2022 total deduction limit is higher at $1,080,000, with spending for equipment purchases capped at $2,700,000. These deductions reduce qualified expenditures on a dollar-for-dollar basis.
Business Income Limit
The total cost of expenses with a 179 deduction cannot exceed the taxable income of the business in any given year, including salary or wages from additional jobs. If your business is operating at a taxable loss, this limitation stops your business from having a 179 deduction. Costs that are disallowed can be carried over to the next taxable year.
How to Take the Deduction
Getting a business vehicle tax deduction requires excellent record-keeping. You should plan to consult with a tax expert who can help you discover any deductions you may have missed.
Here’s how to take your deduction:
- Purchase qualified property and start using it during the tax year.
- Substantiate the financial records of each purchase, including the:
- Date of purchase
- Date you began using the property
- Associated costs of the purchase
- Work with a tax professional who can help you identify all qualifying property
- Use IRS form 4562 to calculate and claim your deduction. Form 4562 is due on the same day as your business tax return.
Deducting Car Sales Tax
You may also be able to write off vehicle sales tax as a deduction if you drive your vehicle for business reasons. You may choose one of the following methods, but not both, to deduct car sales tax.
Write off Vehicle Sales Tax as a Business Expense
You may write off your vehicle sales tax if you drive your vehicle for work by recording the amount you paid in sales tax on line 23 of Schedule C.
Write off Vehicle Sales Tax as an Itemized Personal Deduction
You also may write off your sales tax by itemizing your personal deductions to include any state or local taxes paid on the vehicle. Or, you can deduct the income taxes you paid for that year. You can use the income tax form Schedule A to report these deductions.
Deducting Interest for Financed Vehicles
Deducting interest is only allowed for those who are self-employed or own a business, and only if the vehicle is used for business purposes. If the vehicle is used for personal reasons, that percentage of use cannot be deducted. Only the percentage of time the vehicle is used for business is deductible.
To track this percentage, keep a log of where the vehicle is driven. Even if parking and tolls cannot be deducted this way, your records can support your claim that the vehicle was used for business purposes. Up to 100% can be deducted from interest if the vehicle is only used for business.
FAQs
Here are the answers to some common questions about deducting a car for business use.
You can write off up to $11,160 for qualifying cars and $11,560 for qualifying trucks and vans, as long as you use the vehicle for business purposes more than 50% of the time.
Yes, if you are self-employed and use your vehicle for business reasons, you may deduct car payments under Section 179.
You can write off light Section 179 vehicles (under 6000 lbs.) for a vehicle tax break of $10,200 the first year and continue for the next five years.
Yes, if the LLC can prove that it uses the vehicle for business reasons more than 50% of the time.
Business use includes any travel between two business destinations, travel from one job (or client) to another, and travel to a temporary worksite. Commuting expenses are not deductible.
If you are a business owner using a car for business purposes, your car repairs are tax deductible in most cases, as long as you use the vehicle for business reasons more than 50% of the time.
