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Vehicle Tax Deductions

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Everybody wants to deduct their car expenses, but nobody knows how to do it. If you use your car for your business, you’ll be able to deduct it and pay less tax. Whether you’re an Uber driver or a painter, you can write off your vehicles. But guess what? Deducting your vehicle turns out to be one of the most abused small business deductions (the other ones are Meals and Entertainment Deduction and Home Office Deduction). So like it or not, the IRS will be watching you. We’re going to show exactly how to legally deduct your vehicle to pay the least tax, without triggering any audit alerts.

What if I don’t own a business?

First things first: to deduct your vehicle you need to own a business. If you are an independent contractor, a gig worker (Uber driver, DoorDash driver, Freelance Content Writer, etc.), a sole proprietor, or are an owner of an LLC or Corporation, then you own your own business.

If you don’t own a business and are someone’s employee, you cannot deduct the your vehicle. However, the IRS does allows you to deduct the personal property taxes charged when you register your vehicle provided that your state’s tax is based on the vehicles value. Here’s a link of the States with a DMV Tax Deduction for your convenience.

Deducting your vehicle in 3 easy steps

  • What can I deduct?
  • What is Business Use Percentage (%)?
  • When I buy a car, how can I deduct it?

What can I deduct?

Here are the most common deductions you need to keep track of:

  • Lease payments
  • Gas
  • Vehicle insurance
  • Repairs*
  • Oil changes
  • Updates to the vehicle (new tires, etc.)
  • DMV Fees
  • Apps used to track your mileage
  • Cost of the car

*If your out of pocket repairs are not covered by your insurance, are they deductible.

What is my business use percentage (%)?

Your business use percentage is the percentage of total vehicle expenses you are allowed to deduct. You must track your miles to calculate your business use percentage. Some miles are deductible and some are not.

Deductible miles – business miles are the only miles you are allowed to deduct (e.g. going from one job to another, going to Home Depot to pick up job supplies, etc.).

Non-Deductible miles – there are two types of non-deductible miles. Personal miles and commuting miles. Personal miles are miles unrelated to your business (e.g. miles driven to pick up your kids, or going to the grocery store). Commuting miles are miles driven from your home to-and-from your job, but the IRS says they don’t count.

Total Miles – are your deductible miles and non-deductible miles put together.

As an example, in 2021 you drove 4,860 business miles, 2,640 personal miles, and 600 commuting miles. Your deductible miles are 4,860, your non-deductible miles are 3,240, therefore your total miles are adding all of these miles together to get to 8,100 miles. Your business use percentage would be dividing 4,860 over 8,100, which is 60%.

When I buy a car, how can I deduct it?

According to the IRS deducting a vehicle is one of the most abused deductions, so Congress created the Auto Limits Law (a.k.a. Luxury Car Rules). The Auto Limits Law prevents you from deducting the entire cost of a car in the year you bought it. If you are limited, you will still be able to deduct the car, but you will have to deduct it over 5 or more years (a.k.a. you must depreciate your car).

Auto Limits Law50% rule and Gross Vehicle Weight Rating

There are two conditions to the Auto Limits Law. If you meet either of these, you get less of a deduction in the year you buy your car. They are:

Business Use Percentage (%) is 50% or less – Congress says, if you don’t use your car more than half for business, you less of a deduction when you buy it.

Gross Vehicle Weight Rating is 6,000 pounds or less – when you buy a car you’ll see a sticker on the car that says GVWR (Gross Vehicle Weight Rating). This is key because the more your vehicle weighs, the more you can deduct in the year you buy it. If your automobile is an SUV, Truck, or Van, that weighs between 6,000 and 14,000 pounds, you have no limits at all (sometimes referred to as the “Hummer Tax Break”).

Here’s a chart of the yearly deduction if you have Auto Limits.

YearYearly DeductionBonus Depreciation*
Year 1 (you buy your car)$10,200$6,000
Year 2$16,400
Year 3$9,800
Each succeeding year$5,860
Depreciation Chart if your car is subject to Auto Limits

Example

Adam buys an SUV for $80,000 that weighs 7,200 pounds. His vehicle expenses (insurance, gas, oil changes, etc.) during 2021 is $7,000. If his business use percentage is 60%. His total deduction in 2021 are:

  • Vehicle Cost – $80,000 x 60% = $48,000
  • Vehicle Expenses – $7,000 x 60% = $4,200

Total deduction – $52,200. If you’re in a 25% tax bracket you will save $13,050 in taxes.

Great, now you know how to do it, but I’m sure you have some questions too. Here are the most frequently asked questions.

How do I track Mileage?

The IRS requires you to keep a mileage log. 

This mileage log should list the date, the reason or business purpose for the drive, the destination, the number of miles you drove, the odometer start and stop times. I know you’re thinking that this is a lot of work, and you’re right. Most of us are not tenacious enough to track all this, so thankfully there are apps that track mileage for you. The two most popular ones are MilesIQ and Hurdlr.

What if you can’t track your expenses?

It’s simple, just use the Mileage Method. This is for people that don’t track their vehicle expenses. The Mileage Method is easy to calculate. Multiply the number of business miles you drove by the current IRS mileage rate (i.e. $0.56 for 2021). So, if Adam drove 4,860 business miles in 2021, his deduction would be $2,721.60 (4,860 x $0.56).

Current IRS Mileage Rates

Here is a list of the IRS published mileage rates for 2020 and 2021:

Type of Driving2020 Tax Year2021 Tax Year
Business Mileage57.5 cents / mile 56 cents / mile
Medical / Moving Mileage17 cents / mile 16 cents / mile
Charitable Mileage14 cents / mile 14 cents / mile
Vehicle Tax Deduction Chart – Mileage

How do I avoid an IRS alert of my vehicle deduction?

The IRS heavily scrutinizes automobile deductions. When you deduct a vehicle that’s under 14,000 pounds it is called a “Listed Transaction.” The IRS believes listed transactions are for tax avoidance. Therefore, you must list the vehicle and mileage rate on a special form (Form 4562) of your tax return. That’s why I tell my clients never to list a vehicle as 100% business use. That’s a giant red flag to the IRS because they will never believe that you didn’t take at least one personal trip.

Is there more?

The tax code is complicated. We covered the most important topics, not every single topic. That’s why we recommend that you contact a CPA to go over the fine details of the vehicle business use.

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