Can you write off a car as a business expense?
You technically can't write off the entire purchase of a new vehicle. However, you can deduct some of the cost from your gross income.
There are also plenty of other expenses you can deduct to lower your tax bill, like vehicle sales tax and other car expenses.
Deducting vehicle costs with Section 179
Section 179 of the IRS code allows a taxpayer to write off the cost of certain types of property on their income taxes as a business expense. It was designed to be an incentive for business owners to buy equipment and invest in themselves. To use it, the IRS usually requires the cost of the property to be capitalized and depreciated more on that below.
To qualify for Section 179, your vehicle new or preowned has to meet the following requirements:
- It has to weigh less than 6,000 pounds (excluding ambulances, hearses, and other heavy vehicles)
- It has to be financed and used for business before December 31, and
- It has to be used for business at least 50% of the time.
Note: You can only deduct the business-use percentage of the car's cost. So if you use your car for work 70% of the time, you can deduct 70% of the cost.
As a business owner, gig worker, or self-employed person, you'd use Form 4562 to report your Section 179 deductions.
There's one important thing to keep in mind:to deduct vehicle depreciation, you'll have to forgo the standard mileage deduction. More on that later!
How depreciation works under Section 179
Before, when you purchased an item that qualified as a write-off, you'd only be able to write off a portion of the cost every year.
Section 179, however, lets business owners and self-employed people write off the entire purchase price of qualifying equipment in the one tax year. (This goes for business assets like company machinery, furniture, and even computers as well as cars.)
Naturally, business owners would much rather deduct the cost of the expense in the year they buy.
Limits on Section 179 deductions
Section 179 allows you to deduct a 100% of the cost of qualifying items, up to a certain limit. (For 2021, the total limit is $1,040.000.) After the Section 179 spending cap is reached, you get a nice little perk called bonus depreciation.
For cars specifically, the Section 179 limit is $10,100 $18,100 with bonus depreciation.
Deducting car sales tax
You can only take this depreciation deduction if you use your car for business. But whether or not you bought it for work, there are certain other costs you can deduct, like the sales tax you paid on it.
Writing off vehicle sales tax as a business expense
If you drive your new car for work, you can deduct the sales tax you pay on it using Schedule C. Just put down the amount you paid on line 23.
Writing off vehicle sales tax as an itemized personal deduction
There's an alternative way to write off your vehicle sales tax. You can't use this method if you deduct it on Schedule C you'll have to pick one or the other.
If you itemize your personal deductions, you can write off the state and local sales taxes paid on the new car. (Note that, in some states, your vehicle purchase won't come with a sales tax. These are Alaska, Delaware, Montana, New Hampshire, and Oregon.)
Alternatively, you can deduct the income taxes you paid for the year. You'll have to select one option, because you cant take both.
You report these deductions on Schedule A, an income tax form that you use to report your tax-deductible personal expenses.
Schedule A also lets you write off your tag registration, or vehicle property tax. What you're deducting is the ad valorem tax, which takes the place of sales tax when it comes to vehicle registration. The amount of your ad valorem tax is based on the value of a transaction or of property,
In total, your deduction of state and local income, sales, and property taxes is limited to $10,000.
Deducting interest for financed vehicles
When you finance a new vehicle that you intend to use for work, you can't deduct the entire monthly bill from your taxes. However, you can write off part of your car loan interest.
Remember, you can only deduct the business-use percentage of your car. So if you use your car for work 70% of the time, you can write off 70%of your vehicle interest.
To write off your car loan interest, you'll have to deduct actual car expenses instead of the standard mileage rate. More on that coming up!
Other vehicle tax deductions
If you drive for work, you'll be spending money on your car long after you've finished paying it off. Gas, insurance, and repairs all of that adds up.
Luckily, there are two IRS-approved methods for deducting car expenses: actual car operating expenses and the standard mileage rate. You can find both deductions on your Schedule C, used for reporting business expenses.
You'll have to choose between the two methods, since you can't use both at once.
Deducting actual car expenses
The actual expenses for using your vehicle include costs like gas, miles, insurance, repairs, and maintenance, like oil changes and tire rotations.
Although those expenses may not seem like a lot, the total costs can add up quickly. We recommend using Keeper Tax, our expense tracker app, to keep track of what you spend on your car.
Deducting car expenses based on mileage
The standard mileage rate is an IRS-determined rate that a taxpayer can use to write off all the miles they drive for business purposes. Tracking your miles for taxes will work in your favor if you drive a lot over the course of your work.
Here is an example of how the flat rate works. The standard mileage rate in 2022 is $0.585 from January to June and $0.625 from July to December. (This double mileage rate is pretty unusual. It's the IRS's way of accounting for higher gas prices!)
If you drove 2,000 miles for work from January to June and another 3,000 from July onward, here's how the math would shake out:
- $0.585 x 2,000 = $1,170
- $0.625 x 3,000 = $1,875
- $1,170 + $1,875 = $3,045
All in all, this gives you a tax write-off of $3,045 for the year for mileage.
Remember: If you take the standard mileage deduction, you won't be able to write off either vehicle depreciation or the interest payments on your auto loan.
At Keeper Tax, were on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email if you have questions.