Most businesses use vehicles—cars, trucks, or vans—to conduct their activities. For example, on Schedule Cs for self-employed individuals in 2021 (the most recent year for statistics), deductions for car and truck expenses totaled nearly $9.1 billion! There are numerous tax-related issues for using vehicles in your business. Here is a list of 12 of them (expanded and updated from an old blog):
1. Should you buy or lease the vehicle?
The decision involves not only tax considerations, but also financial ones. Leasing usually allows you to use a more expensive vehicle for less cost than buying. But if the vehicle is going to be driven more than 15,000 miles a year, leasing may not be practical because it will wind up being too costly.
Taxwise, the full lease cost is deductible (minus an “inclusion amount” for expensive vehicles). Inclusion amounts are modest and don’t kick in until the vehicle is an expensive one (e.g., in 2024 inclusion amounts applied when a vehicle cost more than $62,000; the amounts for a vehicle first leased in 2024 have not yet been announced). In contrast, depreciation for a vehicle that’s purchased may be limited to a set dollar amount. Again, the limits apply to more costly vehicles.
2. Who should own it?
Should a business vehicle be owned by the business or an owner? In a corporate setting, the corporation usually should have title to the vehicle because the owner cannot tax any deduction for employee business expenses (e.g., vehicle-related costs) through 2025. For a partnership or LLC, a different answer may apply; owners here may be able to take their unreimbursed costs as a write-off on Schedule E of Form 1040. But business-owned vehicles may have higher insurance costs.
3. Which vehicle should you get?
Obviously, you need to choose the type of vehicle suited to its use in the business. For example, a tradesperson may want a pickup or van to handle tools for the job.
Special tax rules apply to heavy SUVs (those weighing more than 6,000 pounds but not more than 14,000 pounds). Tax rules allow for more of the cost of expensive heavy SUVs to be written off in the first year than comparable lighter vehicles.
4. Should you buy a clean vehicle?
Gas? Diesel? Electric? Fuel Cell? There are many ways to power a vehicle these days. Buying a new or pre-owned clean vehicle—a plug-in electric, plug-in hybrid, or fuel cell vehicle—you may qualify for a federal tax credit. The maximum credit is $7,500 for a new clean vehicle and $4,000 for a previously-owned clean vehicle. There’s also a tax credit for a commercial clean vehicle, which is $7,500 to as much as $40,000. There’s no limit on the number of vehicles for which you can claim the credit. If a business needs 3 SUVs and buys 3 new plug-in SUVs, the total credit could be as much as $22,500.
You may also be eligible for state-level tax breaks. DSIRE has a map where you can find tax breaks in your location.
In addition to tax breaks, consider other factors in deciding for or against an EV. Insurance costs may be higher for an EV. Your location—and need for long-distance driving—may make recharging impractical.
5. If you buy a clean vehicle, should you sell the credit to the dealer?
Why not? Selling the credit to the dealer if you are eligible to do so means you get the benefit from the tax credit immediately. You don’t have to wait until you file your return to enjoy the credit. Sure, there’s a lot of paperwork involved. But the reduction in the down payment is likely worth it.
Note: You cannot sell the credit for a commercial clean vehicle to the dealer.
6. What happens if you let employees drive company vehicles for personal purposes?
The value of personal use of a company vehicle is a taxable fringe benefit to employees. The employer must figure the value of this benefit, and there are several ways to do it. Valuing this driving is explained in IRS Publication 15-B.
7. What records you need to keep for vehicles?
The records needed depends on what vehicle you use.
Whether you buy or lease a vehicle, if you use the standard mileage rate, you need to keep odometer readings, as well as other information about business driving (e.g., date, destination, etc.) This required recordkeeping is explained in IRS Publication 463.
If you use the IRS actual expense method to track business mileage, you’ll need records of fuel/charging costs, maintenance, and other expenses related to business driving.
Regardless of whether you use the IRS standard mileage rate or the actual expense method, you can also deduct parking and tolls…if you keep a record of them.
If you purchase a vehicle and depreciate it, you’ll need to track annual depreciation allowances (which is done automatically if you use tax preparation software or if you have a tax professional do your returns).
If you claim a clean vehicle credit, retain related information (e.g., dealer’s seller report) with tax return papers.
8. Should you trade in an old vehicle?
In the past, when you traded in an old vehicle when purchasing a new one, you could avoid reporting any gain by opting to adjust the basis of the new vehicle (which would limit write-offs for the new vehicle). Now, you’re going to be tax on any gain when you dispose of an old vehicle. Gain is the difference between what you receive for the vehicle and its tax basis (which is zero if the vehicle has been fully depreciated). You may be able to obtain more for the vehicle if you sell it to a third party rather than trade it in at the dealership where you buy a new vehicle, although this may be more trouble than it’s worth.
9. Should you donate an old vehicle?
If you no longer need a vehicle for business, instead of selling it you can donate it to a charity. Some charities use the vehicle in its charitable purpose (e.g., donating a vehicle to an automotive school where the vehicle is used in the classroom); some sell the vehicle to raise cash for charitable purposes. Check tax rules for this on Form 1098-C.
10. Should you have employees drive their personal vehicles on company business?
If you do, be sure you understand liability issues. From a tax perspective, you probably want to reimburse employees for their business driving using an accountable plan. In this way, the company deducts expenses without incurring payroll taxes on the reimbursements. The rules for accountable plans are in IRS Publication 463.
11. Can you deduct commuting costs?
Commuting costs are nondeductible personal expenses. However, if you have a home office, then driving from home to any business location (e.g., a customer, the bank) is deductible.
12. Are vehicle taxes separately deductible?
Sales taxes paid on the purchase of the vehicle are not separately deductible. They are added to the cost of the vehicle and recouped via depreciation.
If you own the vehicle and pay state personal property taxes on it, you can separately deduct these taxes. A self-employed individual takes them on Schedule C. If you’re an employee of your corporation, claim them as an itemized deduction on Schedule A (Form 1040).
Final thought
“Everything in life is somewhere else, and you get there in a car.” – author, E.B. White
Talk with your CPA or other tax adviser about the best way to handle your need for a business vehicle. Budget accordingly.
