Taxpayers who use a car for business can write off certain vehicle costs if they meet the right criteria. Business owners and contractors can write off vehicles using actual expenses or the IRS standard mileage allowance. Employees who aren't reimbursed for business driving can also get a deduction. Even taxpayers who don't use their vehicles for work can claim tax credits for purchasing fuel-efficient vehicles.
Business Use vs. Personal Use
If you're a business owner or you're self-employed and you use your car for business, you're eligible for a tax deduction. How much of a deduction you can take depends on how often you use the vehicle for business vs. personal matters. If you only use the vehicle for business, you can write off 100 percent of the expenses. Otherwise, you have to prorate the expense based on the amount of miles you drive for business. For example, if half your car miles are for your business and the other half are personal, you can only deduct 50 percent of the expenses.
Vehicle Tax Deductions for Business Owners
The IRS allows taxpayers two different options for calculating vehicle-related tax deductions. The first option is to add up all vehicle-related expenses for the year, like licenses, car insurance, gas, oil, maintenance, repairs, and depreciation on your vehicle. If your vehicle is on the expensive side, like a luxury car or a large truck, this will probably get you the largest deduction. However, if you don't want to go through the hassle of keeping track of all these expenses, you can use the IRS standard mileage rate. To calculate mileage expense under this rate, simply multiply the amount of miles you drove for work by the current rate. The rate changes on a regular basis and can be found on the IRS website.
Vehicle Tax Deductions for Employees
If you drive on the job and your employer doesn't reimburse you for gas and other expenses, you can claim the expense on your taxes. Just like business owners, employees have the choice of using actual expenses or using the standard mileage rate to figure vehicle expenses. The difference between the vehicle expense and what you were reimbursed can be a miscellaneous deduction. Report the vehicle expense, along with any other expenses, on Form 2106, Employee Business Expenses.
Tax Credits for Fuel-Efficient Vehicles
Even if you don't drive for your job or business, any taxpayer can get a credit for buying a fuel-efficient vehicle. Federal tax credits are available for both plug-in hybrids and electric vehicles. Exact tax credits are specific to car makes and models, but as of publication, credits range from $2,500 to $7,500 for the purchase of a vehicle. To qualify for the credit, the vehicle must be purchased new or leased new and the vehicle must be primarily used in the United States.