The rules of the road for deducting business-related car expenses

Financial advisors who work with self-employed clients and other business owners using a car in the operation of their company can help them drive down their tax bills.

The tax strategies for business owners deducting car expenses begin with the question of whether to use the relatively simpler standard mileage method that the IRS just adjusted its rates for in 2024 or the more complex calculation of the actual expenses relating to the vehicle. 

Like many tax tools available to self-employed clients, they each require careful records tracking the costs, mileage and, most importantly, the percentage of time they're driving for the business. Small business owner clients may tap into some major tax reduction in the process.

"It provides exceptional value for your clients," said Jerel Butler, a New Orleans-based certified financial planner with Zenith Wealth Partners. "You're able to see firsthand how you can reduce their taxable income by understanding the full slate of business deductions. The most rewarding thing is that clients are really happy that, 'Hey, I didn't understand that I could write off a portion of my vehicle each year.'"

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The standard mileage method
For 2024 taxes, the IRS upped the rate of the business mileage deduction by 1.5 cents year over year to 67 cents. As long as the client has added up the number of miles that she traveled in the car on business, she can find the amount of her potential deduction by simply multiplying the distance by 0.67. 

She and her advisor will want to keep in mind, though, that their choice of using this method may affect the decision in future years. And, if they choose this formula, the IRS will reject any claims for a Section 179 business-expense deduction for the costs of the car.

"To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business," according to a briefing for taxpayers and professionals from the agency. "Then, in later years, you can choose to use the standard mileage rate or actual expenses. For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate."

Some good rules of the road for advisors, tax professionals and their clients on the mileage method include downloading tracking apps such as MileIQ to document the distance and considering where that car sits on the spectrum between a pricey luxury vehicle and the proverbial point-A-to-point-B jalopy, Butler noted.

"That situation may make sense if you have a vehicle that the value isn't a lot but you drive a lot of miles," he said. "It is applied based on the number of business miles driven, not the number of total miles. With the standard mileage method, it is important to keep a mile log."

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Comparing the choices
The selection of methods requires weighing the potential deductions against each other. And the literal number of pounds in "gross vehicle weight rating" from the manufacturer's label often found on the driver's side door registers as a massive factor in the determination.

In one example laid out by a guide from Intuit TurboTax last month, a self-employed rideshare app driver used a car for business 75% of the time and logged 30,000 miles on the job. The driver's expenses for gas, depreciation, auto insurance, maintenance, oil, tires and car washes came to $11,300 for the year. Using the actual expenses calculation in multiplying that amount by the 75% business usage, the deduction would be $8,475. For a standard mileage deduction with the previous 2023 rate of 65.5 cents a mile, however, the deduction is $19,650.

"In this example, the driver is able to deduct $11,175 more by using the standard mileage method than by using the actual expenses method," the TurboTax tutorial stated. "The two methods can yield vastly different results. Be sure to keep all your receipts so you can calculate the deduction both ways and then choose the method that benefits you the most."

Section 179 deductions
The Section 179 calculations for cars run into specific limits based on their gross vehicle weight ratings, Block Advisors by H&R Block noted in a September blog. For cars under 6,000 pounds in the 2023 tax year, the deduction can go as high as $12,200. For those between 6,000 and 14,000, such as full-size sport utility vehicles, pickup trucks and vans, it can go as high as $28,900. The IRS imposes no ceilings on the deductions for the cost of other vehicles above 14,000 pounds like big-rig trucks, hearses, shuttles and cargo vans.   

For self-employed or business owner clients seeking to qualify for a Section 179 deduction for vehicle expenses, IRS rules mandate that they drive in the operation of their company at least half the time in their car. To find the amount of the possible deduction for the cost of buying the vehicle, the taxpayer and their advisor multiply the percentage of time they drive on business by the lesser of the price tag or the available limit based on the weight of the car.

"If you have a vehicle that, No. 1, is over 6,000 pounds and, No. 2, you use for more than 50% for business purposes, you have the ability to deduct up to 100% of the purchase price of the vehicle, and that can result in substantial savings up front for the business owners," Butler said. "If you meet that threshold for the 6,000-pound vehicle and more than 50% of business use, you can elect to use bonus depreciation for the rest of the purchase price."

READ MORE: Mileage rates rise for 2024

Depreciation determinations
Other than the more basic calculations adding up all of the costs of the car, figuring out the depreciation expenses usually proves to be the most complicated aspect of the second method.

The driver in that TurboTax case counted $3,160 in depreciation. Other clients may rack up a much larger sum that makes the expense method much more attractive than the mileage one. As physical assets, cars' depreciation expenses depend on their estimated useful life and whether the owner is using a so-called straight-line calculation or another formula. 

An allowance for bonus depreciation becomes available only in the first year that a business uses a new or pre-owned car, according to a guide by U.S. Bank from last January. The Tax Cuts and Jobs Act of 2017 is pushing down the percentage of depreciation that's eligible for the bonus as well. For 2023, taxpayers and their advisors can only count a bonus of up to 80% of the depreciation. In 2024, that percentage will fall to 60%, followed by 40% in 2025, 20% in 2026 and 0% by 2027. There are also limitations on cars classified as luxury vehicles.

Those bonuses could enable a rideshare app driver who bought a lighter four-door sedan this year to deduct about $20,000 if they're using the actual expense method for the deduction, Butler noted. While the higher standard deduction under the Tax Cuts and Jobs Act has reduced the number of taxpayers itemizing their costs each year, the available car write-offs can help self-employed or business owner clients such as construction contractors reap savings, he said.

"Oftentimes they may have a contract or role at a different location that's outside their home or jurisdiction, and they can rack up a lot of mileage that way," Butler said. "Consultants who may have to travel seven times a week to a remote location — typically, they would be prime candidates for a business vehicle deduction of some sort."