Whether you buy or lease a car for business, it’s a considerable investment. So you want to ensure you’re getting the full tax benefits in the form of deductions and write-offs that will save you money.
This article covers the tax rules for deducting business vehicle expenses, whether you buy a car, lease a car, or use a personal vehicle for business purposes.
When you buy a business vehicle, the IRS expects that it will be used for personal errands and trips only occasionally, and it expects you to keep track of the miles driven for personal use.
Don't put it in the business name if you intend to buy a vehicle and use it primarily for personal trips. Instead, buy it out of your personal funds. (We cover deducting business use of a personal vehicle below.)
First, let’s assume you’re buying a vehicle that will be used only for business purposes—such as a work truck for a construction business or a delivery van for a medical transportation business. This makes your tax deduction straightforward.
Section 179 and bonus depreciation are two parts of the tax code that allow businesses to write off all or part of the costs of certain types of business property as a business expense in the year they’re placed in service rather than capitalizing and depreciating the property over several years. These deductions can save you a ton of money at tax time, but special rules apply when purchasing a company car.
The IRS divides vehicles into three categories:
1. Cars. This is any four-wheeled car, truck, or van made primarily for use on public streets, roads, and highways with an unloaded gross vehicle weight (GVW) of 6,000 pounds or less. For 2022, the maximum first-year deduction is $19,200.
2. SUVs. This is any four-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways with a GVW between 6,000 and 14,000 pounds. There’s no cap on bonus depreciation for vehicles in this category, but the maximum first-year Section 179 deduction is $27,000 for 2022.
3. Other vehicles. These vehicles have a loaded GVW of over 14,000 pounds, including cargo vans, delivery trucks, moving vans, passenger buses, and other special-purpose vehicles. Vehicles in this category can qualify for the entire Section 19 deduction amount, which is $1,080,000 in 2022.
You can still claim a partial Sec. 179 deduction if you use the vehicle for occasional personal use. However, it must be used at least 50% for business activities to qualify for Section 179 expensing. If the car is used less than 50% for business, you can only write it off using straight-line depreciation.
Once your business vehicle is placed in service, you can also deduct the costs of operating and maintaining the car. Once again, calculating your write-off is straightforward if you use the vehicle only for business use. You can deduct all vehicle expenses, including interest on the loan (if financed), fuel, maintenance and repairs, registration fees and taxes, insurance, etc.
However, if you use the car or truck for business trips and personal use, the IRS provides two options for calculating your vehicle deduction.
To use the standard mileage rate, you keep track of the total number of miles you drove for the year and the total business miles, such as visiting clients or job sites or running business errands.
On your tax return, you multiply your total business miles by the standard mileage rate—a figure issued by the IRS each year. For 2022, the standard mileage rate for business use is 58.5 cents per mile.
To use the standard mileage method, you must choose this method in the first year you place the vehicle in service. You can use either the standard mileage rate or the actual expense method in later years—whichever yields the larger tax benefit.
To use the actual expense method, you still need to track the number of miles you drove for the year and the total miles you drove for business. You also need to track all your car expenses, such as gas, oil, maintenance, taxes and registration, loan interest, insurance, parking fees, etc.
To calculate your deduction, you divide your total miles by your business miles to get your business-use percentage. Then you take your actual cost and multiply it by your business-use percentage to figure your deduction.
Whichever method you use, keep in mind that you cannot deduct miles driven between your home and workplace. These are commuting miles, and they’re considered personal use.
You generally can’t claim Section 179, bonus depreciation, or regular depreciation if you lease a company vehicle. Instead, you write off the cost of operating the car using either the standard mileage rate or the actual expense method. If you choose the actual expense method, you can include lease payments in your total expenses.
For leased vehicles, you can choose either method the first year you have the lease, but you can’t change methods for the lifetime of the lease—you’re locked into one method as long as you have the vehicle.
For cars, SUVs, trucks, and vans with a GVW of 6,000 pounds or less, the IRS requires the taxpayer to add a lease inclusion amount to their gross income if the vehicle’s fair market value is over a certain amount. For 2022, that amount is $56,000.
This lease inclusion amount is designed to dissuade small business owners from leasing luxury cars just to claim a larger write-off.
The IRS publishes a lease inclusion table each year. You can find the 2022 lease inclusion amounts in Table 3 of IRS Rev. Proc. 2022-17.
Different deduction rules apply when an employee (or shareholder-employee) uses their personal vehicle for work.
A self-employed business owner can track business miles and use the actual expense method or standard mileage rate to calculate vehicle deductions.
Employees should submit a request for reimbursement for business mileage to the company. The company can reimburse the employee based on the standard mileage rate (58.5 cents per mile for 2022) and take a deduction for the amount paid. That reimbursement isn’t reportable as taxable income to the employee.
When an employee (or shareholder-employee) uses a company car for personal use, it results in taxable wages to the employee unless the employee reimburses the business for personal use.
Personal use of a business car includes commuting between their home and workplace regularly, running personal errands, using the vehicle on vacations or weekends, or use by a spouse or dependent.
There are four ways to calculate the value of an employee’s personal use of a company car, which are explained in detail in IRS Publication 15-B. Calculating the employee’s taxable income related to personal use of a company car, withholding income and payroll taxes, and reporting the amounts on the employee’s W-2 can get complicated. Rather than providing company cars, we recommend reimbursing employees for the business use of their personal vehicles. Just make sure you have employees track their business use and keep records documenting the business use. Otherwise, unsubstantiated reimbursements can be considered taxable income, subject to federal and state income and employment tax withholdings.
Deciding whether to buy or lease a car for business can be complicated. If you need help determining what makes the most sense for your business, schedule a call with Slate. We can help you consider which option is the best in terms of cash flow, tax advantages, and other considerations.
