Car Depreciation for Taxes: The Ultimate Guide | Keeper (2024)

What is vehicle depreciation?

What auto depreciation means for your taxes

The general idea behind car depreciation for taxes is to spread the cost of a car out over its “useful life,” instead of writing off its whole cost the year you buy it.

If you use the standard mileage deduction

Most people are familiar with the term “business mileage.” If you’re not, it’s exactly what it sounds like: the number of miles you drove for work in a given year. This is a great option for people who drive a lot for work, such as truckers or Uber and Lyft drivers. It may also make sense for, say, Turo hosts whose cars get rented out a lot.

Every year the IRS posts a standard mileage rate that is intended to reflect all the costs associated with owning a vehicle: gas, repairs, oil, insurance, registration, and of course, depreciation.

For 2022, that rate is $0.585 per mile from January to June, and $0.625 per mile from July to the end of the year. (The IRS increased it for the last six months as a response to high gas prices.)

Calculating your standard mileage deduction

You can use these rates to calculate your tax deduction at the end of the year. For instance, let’s say you drive 12,000 miles in a year, 5,000 of which were for work. Let's say those were split evenly: 2,500 during the first half of the year and 2,500 during the second half.

Your mileage write-off would be $3,025. (2,500 x $0.585 = $1,462.50, and 2,500 x $0.625 = $1,562.50. Adding them together gives you $3,025).

Don't count the miles you spend commuting

The only rule is that “business mileage” does not include commuting mileage. Commuting miles are the distance you drive from home to work.

If you have a home office as your exclusive place of business (meaning you don’t have a second primary office somewhere else), you’re eligible to include the mileage to and from your home office.

If you use the actual expense method

This expense method allows you to claim your actual vehicle costs, such as gas, oil changes, repairs, insurance, and depreciation. The nice thing about this option is that it's easier to track during the year since you can include the expenses with your other write-offs. You'll still need to keep current notes supporting business purpose of the trips you took.

Make sure you carefully consider which method is most advantageous to you. If you claim mileage your first year, you can switch to actual car expenses the next year. But if you choose the actual method the first year, you're locked in and can't switch to mileage later on.

This is on a per-auto basis. So in theory, you could have two vehicles each using a different method. The only rule is that you can’t alternate between methods on the same vehicle.

How much can you write off for car depreciation?

If you choose the mileage, you won’t be able to claim depreciation as a standalone deduction — it’s already included in the standard mileage rate. But if you use the actual expense method, the amount you can write off as depreciation is your “basis” in the vehicle.

Basis essentially means sunk cost. Let’s say you purchase a used car for $18,000, and after all the fees, taxes, and registration, the total price is $20,000. $20,000 is your basis in the vehicle (regardless of whether you need financing to make the purchase or not).

Before you rush to sign the dotted line, however, you need to be aware that only the business portion of your basis is eligible to depreciate on your taxes.

Most of us don’t have vehicles that are strictly for business use, so we have to treat our autos as “listed” assets, meaning we have to carve out the amount that’s personal. The business portion is calculated the same way as mileage above: business miles / annual mileage = business use.

The basis is multiplied by our business-use percentage to determine the “depreciable basis” of the vehicle for tax purposes. In the example shown above, the depreciable basis on our $20,000 vehicle would be $11,400.

See how this would be allocated on your taxes in the table below:

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Can you get a bigger write-off upfront?

Many people are surprised to learn they can’t deduct the entire cost of their vehicle when they buy it. In response, the IRS has developed ways to “accelerate” depreciation in order to allow a bigger write-off in the first year.

There are currently two methods to accelerate depreciation.

Accelerating depreciation with Section 179

The Section 179 deduction was introduced to incentivize business owners to purchase machinery and equipment. The election enables you to write off the entire cost of the purchase in the first year, rather than depreciating it over its useful life.

The 179 deduction extends to automobiles as well, with the only caveat being that the max write-off is limited to $18,200 for 2021.

Note that the 179 deduction can’t be taken on vehicles used less than 50% for business.

Accelerating depreciation with bonus depreciation

Bonus depreciation makes it possible to claim a bigger chunk of the cost of any machinery and equipment the year you buy it.

How much can you write off with bonus depreciation?

For a car you purchased between 2017 and 2022, it let you write off 100% of the cost in year one. After that, it starts to "phaseout" by 20% every year, until it goes away completely in 2027. Here's how it breaks down:

As you can see, bonus depreciation only gives you a bigger first-year write-off up to 2025. By 2026, you might as well use MACRS, which lets you write off 35%of your car's cost the year you buy it.

Unfortunately, the same auto limits that apply to Section 179 also apply to bonus — the max deduction is $18,200 in the first year. In addition, bonus depreciation cannot be claimed on vehicles used less than 50% for business.

Section 179 vs. bonus depreciation: What’s the difference?

Section 179 gives you the bigger write-off in year one, but bonus depreciation is easier to use. It's automatic, meaning you don’t have to elect anything special to claim it.

Before 2023, Section 179 and bonus depreciation provided the same result.
Consequently, many people found it the more convenient method to use.

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Depreciation on SUVs, trucks, and other heavy vehicles

Up until now we’ve been discussing depreciation as it relates to “passenger vehicles.” A passenger vehicle is what most of us drive. They’re typically not designed to seat more than nine people and usually weigh less than 6,000 pounds.

In many cases, however, freelancers and self-employed people work jobs that require more heavy-duty autos. SUVs, pickup trucks, and other heavy-weight vehicles are categorized as “transportation equipment.” Consequently you’re eligible to claim 100% of their cost under bonus depreciation and Section 179 expensing.

For instance, if you purchase a truck for $80,000, and it meets the transportation requirements, you can claim the full $80,000 in the first year.

To verify that your vehicle meets the transportation requirements, it must have a Gross Vehicle Weight Rating (GVWR) of above 6,000 pounds. Most manufacturers will note this on the vehicle’s label.

Similar to passenger vehicles, if the business use falls below 50%, you’ll have to depreciate it using the straight-line method over its useful life — typically six years for heavy vehicles.

Calculating car depreciation is nobody’s first choice for a Saturday afternoon, but taking the time to consider your options is worth every penny!