How to Deduct Depreciation of a Vehicle

Deducting the depreciation of a business vehicle can be one of the most effective tax strategies for a business, but the rules surrounding it are specific and often confusing. Mastering this deduction means understanding your options, from the simple standard mileage rate to the more complex but often more rewarding actual expense methods. This guide breaks down exactly how to calculate and claim vehicle depreciation, explains powerful tools like Section 179 and bonus depreciation, and highlights the critical recordkeeping required to support your claim.

Understanding Business Vehicle Depreciation

In simple terms, depreciation is the method used to recover the cost of an asset—in this case, your vehicle—as it loses value over its useful life due to wear and tear. Instead of writing off the entire purchase price in one year, you expense a portion of it each year for several years. This reduces your taxable income annually.

The single most important rule is that you can only depreciate the portion of the vehicle's cost related to its business use. If you use your car for both business and personal trips, you must calculate its business-use percentage.

How to Calculate Business-Use Percentage:

(Total Business Miles Driven / Total Miles Driven for the Year) x 100 = Business-Use Percentage

For example, if you drive 20,000 miles in a year, and 15,000 of those miles were for business purposes, your business-use percentage is 75% (15,000 / 20,000). You can only apply depreciation deductions to 75% of your vehicle's cost basis. It's vital to begin tracking your mileage from the day the vehicle is placed in service to establish this accurate percentage.

Choosing Your Method: Standard Mileage vs. Actual Expenses

The IRS gives you two primary methods to deduct vehicle expenses. Your choice, which you must typically make in the first year the car is used for business, has significant future consequences.

• Standard Mileage Rate: This is the simplest method. The IRS sets a standard rate per business mile driven for the year (for example, 67 cents a mile in 2024). You multiply your business miles by this rate to get your deduction. Importantly, an amount for depreciation is already factored into this rate. Therefore, if you choose the standard mileage method, you cannot take an additional, separate deduction for depreciation.
• Actual Expense Method: This method requires more detailed recordkeeping but can result in a much larger deduction, especially for more expensive cars or those with high operating costs. You track and deduct the business-use percentage of all your car-related costs: gas, oil changes, insurance, tires, registration fees, repairs, and, most importantly, depreciation. The remainder of this article will focus on how to properly claim depreciation under this method.

The Actual Expense Method: A Deep Dive into Depreciation

If you opt for the Actual Expense Method, you have several ways to calculate and claim your depreciation deduction. These powerful options offer flexibility in how quickly you recover the vehicle's cost, allowing you to maximize tax benefits in the years they matter most.

MACRS Depreciation

The Modified Accelerated Cost Recovery System (MACRS) is the standard depreciation system used for most business assets, as detailed in IRS Publication 946. Under MACRS, passenger cars and light trucks are typically classified as 5-year property. An "accelerated" system means the depreciation deductions are larger in the early years of the asset's life and smaller in the later years.

For a vehicle classified as 5-year property, the annual depreciation percentages are generally as follows:

• Year 1: 20%
• Year 2: 32%
• Year 3: 19.2%
• Year 4: 11.52%
• Year 5: 11.52%
• Year 6: 5.76% (to account for the half-year convention)

Example: You purchase a $40,000 truck used 100% for business. Using standard MACRS, your year-one depreciation deduction would be $8,000 ($40,000 x 20%). However, there are even faster ways to claim that cost.

Section 179 Expense Deduction

Section 179 of the Internal Revenue Code allows you to treat the cost of qualifying assets as an immediate expense rather than a capital expenditure. This means you can potentially deduct the full purchase price of the vehicle in the year you buy it and put it into service. This is a game-changer for managing taxable income.

To qualify for a Section 179 deduction, the vehicle must be used more than 50% for business. However, for most passenger vehicles, cars, and light trucks, the Section 179 deduction is limited by the luxury vehicle caps (more on that below).

The real power of Section 179 comes from a well-known exception: heavy vehicles. Trucks, vans, or SUVs with a Gross Vehicle Weight Rating (GVWR) of over 6,000 pounds are not subject to the same strict limits. For these heavy vehicles, you may be able to expense a significant portion—and sometimes all—of the purchase price in the first year, subject to the overall Section 179 annual spending limits.

Bonus Depreciation

Bonus depreciation is another form of accelerated depreciation that allows you to deduct a large percentage of an asset's cost in its first year of service. Unlike Section 179, there is no annual deduction limit, and an asset can be deducted even if it creates a business loss.

The Tax Cuts and Jobs Act of 2017 set bonus depreciation at 100%, but it is now phasing out. For 2023, the rate was 80%, for 2024 it's 60%, and it will continue to decrease by 20% each year after unless Congress extends it. The great thing about bonus depreciation is that for passenger vehicles, it can be claimed in addition to the standard MACRS depreciation limits, giving you a bigger first-year write-off.

Be Aware of Luxury Automobile Depreciation Limits

To prevent lavish write-offs for high-end personal vehicles disguised as business cars, the IRS sets annual limits on depreciation deductions for passenger automobiles.

A passenger automobile is defined as any four-wheeled vehicle with a GVWR of 6,000 pounds or less. The annual limits for a car you place in service are updated yearly by the IRS. For example, for a car placed in service in 2023, the absolute maximum first-year depreciation deduction—including Section 179 and an extra $8,000 allowed for bonus depreciation—is $20,200. This is significantly less than the purchase price of many new vehicles today.

This is precisely why the so-called "Hummer loophole" or heavy vehicle exception is so important. Vehicles with a GVWR over 6,000 pounds are not considered passenger automobiles and are not subject to these strict caps. This category often includes many larger SUVs, heavy-duty crossover vehicles, and pickup trucks, making them very attractive purchases for business owners who want to maximize their first-year tax deductions through Section 179.

Recordkeeping: Your Most Important Job

None of these depreciation deductions will hold up under scrutiny without proper documentation. Meticulous records are not just recommended—they are required. An IRS audit involving vehicle expenses will almost always start with a request for your mileage log.

At a minimum, your records for the actual expense method should include:

• A contemporaneous mileage log: You must track each business trip, including the date it occurred, your destination, the business purpose of the travel, the vehicle's starting and ending mileage, and the total miles driven. Many mobile apps can help automate this, and accounting software packages like QuickBooks Online often include mileage tracking features.
• All receipts: Keep every single receipt related to your vehicle, including invoices for its purchase, gas station receipts, insurance statements, repair bills, tires, oil changes, and registration costs.
• Basis and Date In-Service: Document the original cost of the vehicle and the specific date you officially began using it for your business.

Final Thoughts

To properly deduct vehicle depreciation, you must use the actual expense method, document your business-use percentage, and decide between MACRS, Section 179, and bonus depreciation. Understanding how these systems interact, especially regarding luxury auto limits and the heavy vehicle exception, is fundamental to maximizing your deduction and creating a strong tax-saving strategy.

Navigating the interplay between MACRS schedules, Section 179 heavy vehicle qualifications, and the latest bonus depreciation phase-outs is highly specific work. When a client wants to know if their new Ford F-150 qualifies for the full write-off this year, accuracy is non-negotiable. Our AI search platform for tax professionals, Feather AI, provides direct, citation-backed answers from authoritative IRS Codes and Procedures, helping you deliver confident, defensible guidance in seconds.