Tax Explainer: How to Write Off a New Car
Angie M Grainger
It is possible to write off a car for business, but each situation is different and there are limitations.
Primary Use for Business: To claim deductions for a new car, it must be used primarily for business purposes, which means it's used more than 50% of the time for business-related activities.
Recordkeeping Requirements: Keeping detailed records of mileage and usage is essential to substantiate the business use percentage of the vehicle. This includes maintaining a mileage log that documents trips made for business, commuting, and personal purposes.
Personal Use Limitations: If the car is used for personal purposes, such as commuting or personal errands, the portion of the vehicle's use attributed to personal activities generally cannot be deducted. Your accountant should back out all personal use from your books.
Limitations on Deductions
Luxury Vehicle Depreciation Limits: The IRS imposes depreciation limits for luxury vehicles used for business purposes. The IRS doesn't have a specific definition of what constitutes a "luxury vehicle." It generally means any passenger vehicle and the depreciation deduction for these vehicles is subject to annual limits, regardless of the actual cost of the vehicle.
Bonus Depreciation: Luxury autos are limited to a first year bonus deduction of $20,200 in 2023 and goes down each year. This changes annually, so be sure to check current limitations. To get around these limitations, you can purchase a vehicle that qualifies for Section 179.
Section 179: A deduction is allowed for vehicles with a gross vehicle weight rating (GVWR) above 6,000 pounds. This rule allows businesses to deduct the cost of qualifying vehicles, including SUVs, trucks, and vans, as an expense rather than depreciating it over several years. Under Section 179, businesses can immediately deduct 80% of the purchase price of qualifying vehicles purchased and placed into service during the tax year, for 2023. You can't deduct more than your income however, has Section 179 cannot create a loss.