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How To Write Off A Car For Business

Using your vehicle a lot for work can have a few advantages, despite your feelings about the gas bill. Self-employed individuals can deduct many car-related expenses as a vehicle tax write-off. This can play a big role in reducing estimated tax payments down the line. Whether you own your vehicle, use your company’s or lease it, some costs are tax-deductible. We’ll break it all down and answer questions like can I write off my car payment, is auto loan interest tax deductible, is car insurance tax deductible and can an LLC write off a car purchase.

Table of contents

Key takeaways...Read more

Are car payments tax deductible?...Read more

When can I claim my car on my taxes?...Read more

1. You drive a personal vehicle...Read more

2. You drive a company vehicle...Read more

3. You drive a leased vehicle...Read more

2 ways to claim the vehicle tax write-off...Read more

The standard mileage method...Read more

The actual expenses method...Read more

Key takeaways

Car loan interest is tax deductible if the vehicle is used for business.
Self-employed individuals can write off a car for business, even if it is leased or owned by their company.
You can use the standard mileage or actual expenses method to claim the vehicle write-off for business in 2023.

Are car payments tax deductible?

Let’s start with a big one: are car payments tax deductible? Unfortunately, car payments, in most cases, do not directly qualify for a vehicle tax write-off. However, there are some exceptions and specific circumstances where you may be able to deduct a portion of your car payments, typically when the vehicle is used for business purposes. So, what qualifies as a business vehicle? The IRS allows any vehicle used for work-related tasks to be considered a business vehicle. This can include a van for your construction company, a sedan for your Uber gig or even a food truck for your coffee business. Your vehicle can qualify for a car tax deduction if its use is ordinary and necessary to your business. You can find other 1099 write-offs to deduct with a 1099 tax calculator. Business deductions lower your taxable income, so you want to claim every expense you can.

Infographic entitled Examples Of Business Vehicles showing vehicles that can be a car tax write-off.

When can I claim my car on my taxes?

There are three situations where you can claim the tax write-off for your car – you have a personal car that you use for work, you use a car financed by your company or you have a leased vehicle. Each situation is different, and you might need to talk to a tax pro if this is the first time you’re claiming this deduction. However, all these situations allow for some vehicle-related expenses to be deducted as long you have the right records for them. You might now be asking, “Is car loan interest tax deductible?” and yes, interest on a car loan is tax deductible if the car is used for business purposes. But if you work as an employee within another company, you can’t generally claim this deduction. Any interest paid on a loan used for buying a car exclusively for personal use is also not eligible for a tax deduction. Make sure to save all your payment-related documents to claim the tax write-off for your car, otherwise, the IRS may hit you with an audit notice.

Infographic entitled When To Claim Car On Taxes listing situations when a vehicle is a tax write-off.

1. You drive a personal vehicle

If you drive a personal vehicle you also use for work, you can claim the business portion of your car expenses as a tax deduction. Let’s say you drive for Postmates a couple of times a month as a side hustle. You also use your car to drive to your W-2 job and for other general activities. In this case, you can only write off the miles driven for your Postmates gig. This is because W-2 employees cannot deduct vehicle mileage as a business deduction. And as your Postmates job earns you 1099 income, you can also deduct other expenses like gas, tolls and parking fees as write-offs to lower your self-employment taxes. Even expenses like CTP (Compulsory Third Party) insurance and car insurance are tax deductible. Using your vehicle for personal and business reasons also means you’ll have to calculate the business use portion of your expenses that can be deducted. If you use FlyFin, you can take advantage of the expert, unlimited CPA support and let tax preparation and filing become simpler. A.I. also finds business deductions from your expenses, making sure you save every penny.

2. You drive a company vehicle

What if you’re an independent contractor who operates as a small business? You might wonder, can an LLC write off a car purchase? If the loan is taken out in the name of your business, the monthly payments are probably made directly from your business's bank account. Then, it's highly likely that your vehicle is exclusively used for business purposes, and you can claim a 100% deduction on the interest you're paying for your car loan. You can claim this deduction and other 1099 write-offs using the standard mileage method or the actual expenses method. We’ll talk about how to do this later.

3. You drive a leased vehicle

You now know that car loan interest is tax deductible if a car is used for business, but what about leased vehicles? Can lease payments be a deductible business expense? Is gas tax deductible, too? Just like loan interest, self-employed individuals can deduct lease payments as a business expense if a vehicle’s usage (or at least a portion of it) is work-related. For example, if your car is determined to be used for business purposes 40% of the time, and your monthly lease payment is $800, you can deduct $320 each month as a vehicle tax write-off, along with other related expenses (like gas). When leasing a vehicle for business purposes, it's important to consider the impact of the vehicle's value on your tax deductions. If the value of the leased vehicle exceeds a certain threshold, you're required to subtract an "income inclusion" amount from the deductible portion of your lease expenses. This rule ensures that the tax benefits between leasing and owning business vehicles are equal. Starting with vehicles leased in 2023, the threshold for applying this rule is set at $60,000. The specific income inclusion amounts depend on factors like the lease amount and the duration the leased vehicle is used for business purposes. It’s worth noting that the income inclusion amount increases annually for a period of five years.

2 ways to claim the vehicle tax write-off

You can either choose to claim the car tax deduction with the standard mileage method or the actual expenses method. You've got to start with the standard mileage rate in the first year the car becomes available for business use. After that, you can switch back and forth between the standard mileage rate and the actual expense method, depending on what works best for you. Regardless of the method you choose, you will report these expenses on Schedule C.

nfographic entitled How To Claim Mileage On Taxes listing two ways to claim the vehicle write-off for your business in 2023

The standard mileage method

The standard mileage method is probably the easier method to claim a tax write-off for your car. All you have to do is track your business miles and multiply it by the IRS mileage rate to calculate your deduction. For 2023, the IRS set the mileage rate at 65.5 cents/mile. This is an increase from 62.5 cents/mile for the second half of 2022. You can track your miles using a mileage tracker app or a mileage logbook. Opting for the standard mileage deduction comes with a few rules to play by. Firstly, when you choose this method, you can't separately write off any other vehicle expenses. So, individually deducting things like gas, maintenance or insurance is a no-go. While the standard mileage rate covers a lot of ground, some expenses are left out in the cold. These include parking fees, tolls, DMV fees, car washes and interest on a car loan that is tax-deductible. In other words, you'll still need to keep an eye on these costs and track them separately if you want to claim them as a deductible business expense. So, while it simplifies the process, you can't entirely get out of expense tracking. Let’s say you’re a graphic designer who works from home. You keep a mileage log to record the date, purpose and mileage for each trip. At the end of the year, you calculate that you drove a total of 12,000 miles throughout the year. Of those, you estimate that 8,000 miles were directly related to your business activities. To calculate your vehicle deduction, you simply multiply the business miles by the IRS standard mileage rate. So, your deduction for 2023 would be:

8,000 x $0.655 = $5,240

Infographic entitled Updated 2023 IRS Mileage Rate showing the latest rate for claiming the self-employed mileage deduction.

When tracking your vehicle mileage, keep in mind that “commuting miles” are not eligible for a tax deduction. This includes miles driven to and from your workplace and your home. Let’s use the same example from before. You have a home office where you conduct most of your work. You live in the suburbs and drive into the city once a week to meet with a client. The distance from your home to the city is 15 miles each way. These 30 miles are considered commuting miles, as it is not for the exclusive purpose of conducting business. In addition to your weekly networking meetings, you often travel to meet with clients, work on projects, or attend design conferences in different parts of the city. You drive 20 miles to meet with a client to discuss a new project, 10 miles to attend a design workshop, and 15 miles to visit a client's office for project updates. These 45 miles are considered business miles, as they are the miles you travel for work-related activities.

The actual expenses method

With the actual expenses method, you’ll have to do a lot more tracking and a lot more math. If you decide to go with the actual expense method in your first year, you won't be able to switch to the standard mileage deduction in the following years; it's a one-time choice. And apart from mileage, you can also deduct other vehicle-related costs as 1099 write-offs. The main thing about this method is calculating the business use percentage of your deductible business expenses. These expenses include:

Tolls
Parking
Gas
Maintenance
DMV fees
Oil
Insurance
Lease payments
Licenses
Registration fees
Vehicle depreciation

Say you’re a self-employed real estate agent interested in claiming the car tax write-off. You choose the actual expense method and gather your bills and receipts to total your expenses. Throughout 2023, you incur the following vehicle-related costs:

Gas: $2,400
Repairs and maintenance: $1,500
Insurance: $1,200
Auto loan interest: $1,800
Parking fees and tolls: $300 on parking fees and $150 on tolls while traveling to property showings and client meetings

Your total vehicle expenses for the year add up to $7,350. Of these expenses, you estimate that 75% were directly related to your business. So, your vehicle deduction for the year would be:

$7,350 x 75% = $5,512.50

If you bought your vehicle a few years ago, you might also be eligible to claim deductions based on the car's original purchase cost. Here's how it works: The IRS allows you to factor in the depreciation of your car, but only if the depreciation occurs while the vehicle is actively being used for business purposes. If your vehicle qualifies for bonus depreciation, you can deduct up to 80% of the original cost in the first year. Deciding to choose between these two methods requires a lot of research. If you drive a lot for work, the standard mileage method might be beneficial. But if you have a lot of vehicle expenses, the actual expense method could give you a bigger tax break. The IRS generally recommends calculating your write-off with both methods and the one that gives you the higher deduction.

Office Supplies Tax Deduction

Office supplies are tax deductible for self-employed individuals and can be reported under the office expenses category on Schedule C.