Cars are one of the most expensive items to own, both in terms of the initial investment we make in them and in the cost of ongoing maintenance. Fortunately, there are valid ways to offset these expenses with tax deductions. You might qualify for one or more of these options for personal, small business, self-employed, or business deductions.
Key Takeaways
- If you own a business or work for yourself, you may recognize that owning and operating a car for work purposes can become a large expense.
- The IRS allows certain car expenses used for qualified business purposes to be written off on one's tax returns.
- There are several deductions and ways to include car costs as a business expense, including donating an old car to charity, logging business miles traveled, and adding vehicles to a company fleet, among others.
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1. Donate Your Car to Charity
If your old car isn't going to make it much longer, and the cost of repair isn't worth the investment, consider donating it to charity rather than trying to make a little money selling it used. You'll save the hassle of putting up an ad and dealing with potential buyers who want to talk you down from your price. And if you know your car isn't worth a whole lot, you may be better off donating it, which will give you a deduction for the market value the car still has.
Many charitable organizations will even pick up your donated car for you. This method of tax deduction can apply to personal or business applications, just make sure you get an official receipt from the charity, which should include the value of the vehicle you donated.
2. Buy an Electric or Hybrid Car
Purchasers of plug-in electric vehicles are eligible for up to $7,500 in EV tax credits if their adjusted gross income does not exceed $150,000 for individuals, $225,000 for heads of households, or $300,000 for married couples filing jointly. The tax credit is non-refundable, meaning you must owe at least $7,500 in federal taxes to realize the full value of the tax credit. Any excess credit cannot be carried forward to future tax years.
Important
If you took possession of the vehicle after April 18, 2023, the vehicle must meet mineral and battery requirements in order to claim the credit.
To qualify, the vehicle must have an external charging source and weigh less than 14,000 pounds. The credit phases out once the manufacturer has sold 200,000 qualifying vehicles.
3. Convert Your Car
Keeping your current car but wanting to reduce emissions? Look into an electric drive conversion kit, which you can hire a professional mechanic to install onto your car.
Note
Systems and equipment used for conversions must meet be certified by the Environmental Protection Agency. Those doing the conversion also must be a qualified system retrofitter (QSR) and meet National Highway Traffic Safety Administration standards.
Before you purchase the kit, get a mechanic's opinion on whether your car is worth converting; in some cases, such as on older cars that don't have much life left in them, the cost of conversion may be an investment not worth making. But if you have a newer car with a lot of life left in it, converting can save you on fuel costs.
4. Deduct Business Use
If you are a freelancer and otherwise self-employed individual, you can deduct car expenses such as depreciation, gas, tires, repairs and maintenance, insurance, and registration fees—even if it's for your personal vehicle. The best method to do this is if you work under a sole proprietorship rather than as a legal business structure such as a corporation.
The key here is to keep meticulous records of your mileage, which is used to determine what percentage of car costs qualify as tax deductible.
5. Deduct Repairs for Small Business Fleets
If you're running a small business, a vehicle used exclusively for business can add to your yearly tax deductions as part of your operating expenses. While the cost of overhauling a business vehicle doesn't qualify as a deduction (overhauling must be included in capitalization cost and calculated in the depreciation cost), the cost of repair can be deducted. Keep clear records of repairs, because just claiming an estimated cost won't go over well with the IRS.
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6. Deduct Unreimbursed Business Expenses
Under certain circ*mstances, you can deduct expenses for the work-related use of your vehicle if your company has not reimbursed you. But to take the deduction, you must be considered an eligible educator or “qualified employee,” which is defined as Armed Forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses. Other workers are not permitted to deduct unreimbursed car expenses from their income.
Employees must keep accurate travel records (including mileage, time of trip, place, and business purpose) to be able to deduct non-reimbursed expenses.
What Car Expenses Can You Write Off?
Most expenses can be written off for those who qualify for a business expense deduction. The interest for the auto loan is an example of a possible tax-deductible expense. Qualified individuals include those who are self-employed and use the vehicle for work, armed forces reservists, some performing artists, and fee-basis government officials.
How Do You Write Off a Car 100%?
If you purchase a vehicle for business use, you can deduct up to $19,200 for passenger vehicles and up to $27,000 for sport utility vehicles.
How Do You Write Off a Car Over 6,000 Pounds?
It is possible to claim a deduction for vehicles that weigh more than 6,000 pounds but less than 14,000 pounds as other property used for transportation.
The Bottom Line
Unless you're using your car exclusively for your business, you can't deduct the full cost of purchasing, maintaining, and repairing it. You can and should, however, deduct what you can. The key, as with almost any issue to do with the IRS, is having clear records to support your claims.
