As a business owner, it is extremely crucial to understand the IRS rules around deducting vehicle expenses so that you can use them to your advantage.
There are two methods for claiming expenses on the use of your vehicle for business purposes:
1. The standard mileage rate.
This method is pretty straightforward. Take the amount of business miles driven, and multiply this number by the standard mileage rate ($0.655 per mile in 2023).
As an S-Corp owner, you can have the business reimburse you, using the standard mileage rate, which would be an expense for the business.
2. Actual Expenses method.
Take the amount of business miles driven and total miles driven. Whatever the business use % was, multiply this by the amount of total vehicles expenses you had during the year (gas, repairs, etc.)
As an example:
5,000 miles driven, 4,000 of them were for business. $2,000 spent on gas during the year, and $1,000 spent on insurance. The deduction is (80% * $3,000) = $2,400
It is important to note that in addition to those gas and fuel expenses, when using the actual expenses method, you can take an accelerated depreciation deduction on the car.
From Sep 2017 though Dec 2022, Business owners could deduct 100% of the purchase price for business vehicles that they purchased in the first year they’re placed in service that weighed over 6,000 pounds, loaded at max capacity (hence, videos you might have seen where someone brags about writing-off their new G-Wagon).
For 2023, that limit is down to 80%.
For a vehicle that weighs under 6,000 lbs, only $8,000 can be deducted in the first year via bonus depreciation.
There also exists a separate accelerated depreciation deduction for business vehicles: Section 179.
Sec. 179 deduction can be combined with bonus depreciation.
Section 179 breaks down business vehicles into three categories: Light (under 6,000 lbs), Heavy (6,000 lbs – 14,000 lbs), and any vehicle over 14,000 lbs or a vehicle modified for nonpersonal use (shuttle vans, delivery van with cargo, etc).
- For light vehicles, one can deduct up to $12,000 in the first year placed in service.
- For heavy vehicles, one can deduct up to $28,900
- For the last category, there is no limit to the deduction. One can deduct 100% of the cost.
It is important to note that one can only take a section 179 deduction on a vehicle they use over 50% for business purposes.
If, in future year, the business use % drops below 50%, the taxpayer must recapture the amount of the deduction they took via 179 as ordinary income.
Now that we have laid out the tax laws, here are some rules of thumb to follow, based on your situation:
- Low cost vehicle, high business mileage, take standard mileage rate
- Low mileage, moderate cost, over 50%+ business use, take actual expenses method and depreciate/take section 179
- Low mileage, expensive vehicle, 50% + for business, take actual expenses and depreciate/179, but ALSO consider leasing the vehicle instead
- Under 50% business use – must use standard mileage rate
- SUV or Truck over 6,000 lbs (therefore lower mpg, more fuel to write off) take actual expenses method, and take section 179 depreciation/bonus.
- Electric or hybrid = higher mpg, less fuel to write off. Go standard mileage method. MAKE SURE YOU CLAIM ELECTRIC VEHICLE TAX CREDIT
