Introduction
Small business owners and self-employed individuals often use their vehicles for work-related purposes. The IRS allows deductions for business-related car expenses, but specific rules apply. You can choose between the standard mileage rate or actual expenses method to reduce your taxable income.
This guide explains what qualifies, how to calculate deductions, and the IRS forms you need to claim your car expenses in 2025.
Who Can Deduct Car Expenses? (IRC §162 & §274(d))
You can deduct vehicle expenses if:
- You are self-employed, a freelancer, or own a business.
- You use your vehicle for business purposes (client meetings, deliveries, travel between job sites).
- The expenses are ordinary and necessary for your trade.
Who Cannot Deduct Car Expenses?
- Employees cannot deduct work-related car expenses unless reimbursed by their employer (due to the Tax Cuts and Jobs Act).
- Commuting expenses (driving from home to your regular workplace) are not deductible.
- Two Methods for Deducting Car Expenses
Standard Mileage Rate Method (IRC §274(d))
The IRS standard mileage rate for 2025 is $0.67 per mile.
What It Covers:
- Gas, oil, maintenance, repairs
- Depreciation, lease payments, insurance
- Registration fees and taxes
How to Calculate:
- Track your total business miles.
- Multiply by the IRS rate ($0.67 per mile in 2025).
Example:
David drives 10,000 business miles in 2025.
- 10,000 × $0.67 = $6,700 deductible using the standard mileage rate.
Actual Expenses Method (IRC §162(a))
Deduct actual car-related costs based on the percentage of business use.
Eligible Expenses:
- Gas and oil
- Maintenance and repairs
- Insurance and registration
- Lease payments or depreciation
- Tolls and parking fees
How to Calculate:
- Determine your business use percentage (business miles ÷ total miles).
- Multiply total car expenses by this percentage.
Example:
Sarah’s total car expenses = $8,000 (gas, maintenance, insurance).
- Business use = 75%
- Deduction = $8,000 × 75% = $6,000
Which Method Should You Use?
- Use the standard mileage rate if you drive a lot for business and want a simple deduction.
- Use actual expenses if you have high vehicle costs (new car, repairs, high insurance).
- You must choose a method the first year you use the car for business.
- Leased vehicles must use the same method for the entire lease period.
What Car Expenses Are Fully Deductible?
- Tolls and parking fees for business trips
- Business-related car loan interest (self-employed only)
- Registration and licensing fees (proportional to business use)
Non-Deductible Expenses:
- Personal use of your car
- Fines, traffic tickets, and parking violations
- Commuting to and from work
How to Claim Car Expense Deductions
Step 1: Keep Detailed Records
- Mileage log (date, purpose, starting/ending odometer readings).
- Receipts for gas, repairs, insurance, and maintenance.
Step 2: Complete IRS Forms
- Schedule C (Form 1040) – Report business income and expenses.
- Form 4562 (Depreciation and Amortization) – If claiming depreciation under the actual expenses method.
Step 3: File Your Taxes
- Use tax software or a CPA to ensure compliance with IRS rules.
Conclusion
Small business owners can reduce taxable income by deducting car expenses, but choosing the right method is key. Keeping accurate records ensures compliance and maximizes savings.
Need help? Schedule a consultation with Anshul Goyal, CPA EA FCA to ensure you claim the right car expense deductions.
Disclaimer
This article is for informational purposes only and should not be considered tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional, such as Anshul Goyal, CPA EA FCA, before making any tax-related decisions.
FAQs
1. Can I deduct car expenses if I use my car for both business and personal use?
Yes, but you can only deduct the business-use percentage of expenses.
2. What if I use multiple vehicles for my business?
You must track expenses separately for each vehicle and apply the same deduction method to each.
3. Can I switch between the mileage rate and actual expenses method?
- If you start with the standard mileage rate, you can switch later.
- If you start with actual expenses, you must continue using it.
4. Can I deduct car lease payments?
Yes, but only the business-use portion of the lease payments is deductible.
5. What IRS form do I need to claim car expenses?
Use Schedule C (Form 1040) and Form 4562 for depreciation if applicable.