CHAPTER 7
Your Car
Americans love their cars. According to Hedges & Company, there were 289.5 million vehicles registered in the United States as of 2021. Cars can be expensive to buy or lease and to operate, especially with today's high fuel prices. When prices spiked at the pump during 2022, some states had “tax holidays” by lowering or waiving their state tax on gasoline for a set period. Federal tax law provides some relief for your car use by way of tax write‐offs.
This chapter explains the tax breaks you can take for your car (the term may also cover light trucks and vans for certain purposes as explained later). Deducting the use of your car for medical‐related travel is discussed in Chapter 2. Deducting the use of your car when working as a volunteer for charity is discussed in Chapter 6.
For more information, see IRS Publication 463, Travel, Gift, and Car Expenses and IRS Publication 535, Business Expenses.
Business Use of Your Personal Car
According to the U.S. Department of Transportation's Federal Highway Administration, Americans drive their cars on average 13,500 miles each year, although remote working arrangements may mean fewer miles driven annually. The cost of driving can be high when you factor in gasoline, insurance, and other costs. But the tax law lets a portion of the cost of this mileage be deductible under certain circumstances.
Benefit 
If you use your personal car for business and you are self‐employed, you can deduct expenses related to the business use of your car. For example, if you are an independent contractor (not an employee) and use your car to drive for Uber or Lyft, you are eligible for a deduction.
There is a choice of methods for claiming your deduction: You can deduct your actual expenses, including an allowance for depreciation if you own your car or lease payments if you lease it (“actual expense method”), or you can claim the IRS standard mileage rate.
The IRS standard mileage rate is 58.5¢ per mile for business driving in the first half of 2022 and 62.5¢ per mile in the second half of 2022. Whichever method you select, you can also deduct parking and tolls that are business expenses (and not for personal commuting).
There is no dollar limit on what you can deduct for your car use each year. However, if you own your car and use the actual expense method, there are dollar limits on how much you can deduct for depreciation or first‐year expensing (unless your car weighs more than 6,000 pounds).
If your employer reimburses you for business use of your car under an “accountable plan,” you do not have to report the reimbursements as income (the reimbursements are not even included on your Form W‐2). Ask your employer if reimbursements are made under an accountable plan, or check your W‐2 form.
Conditions
To claim write‐offs for business use of your personal car you merely have to keep good records, as explained later. However, what you can deduct may be limited by certain conditions.
STANDARD MILEAGE RATE
You can use the IRS standard mileage rate whether you own or lease your car. The standard mileage rate takes the place of separately deducting gas, oil, repairs, new tires, vehicle registration fees, insurance, and depreciation if you own the car, or lease payments if you lease the car.
However, you cannot base your car deduction on the standard mileage rate if you have depreciated your car or claimed first‐year expensing. This would have occurred if you owned your car in a previous year and claimed the actual expense method.
DEPRECIATION
If you own your car and use the actual expense method, you can claim an allowance for depreciation (including bonus depreciation) or elect first‐year expensing. Cars are treated as 5‐year property; for depreciation purposes they have a 5‐year recovery period. Because of a special rule, however, a part of the depreciation allowance is limited in the first year so that the balance must be claimed in a sixth year if you still own the car at that time. (Remember, you apply depreciation only to the business‐use portion of the car, and you can use accelerated depreciation only if the car is used more than 50% for business; if business use is 50% or less, you are limited to straight‐line depreciation.)
If you use accelerated depreciation (and are not subject to a special rule called the midquarter convention, which applies if you place more than 40% of all of your depreciable property in service in the last quarter of the year), your depreciation rates are:
- Year 1 (the year the car is placed in service): 20%
- Year 2: 32%
- Year 3: 19.2%
- Year 4: 11.52%
- Year 5: 11.52%
- Year 6: 5.76%
Instead of depreciating the business‐use portion of your car, you can elect to expense it in the year it is bought and placed in service. However, like depreciation, this option may be restricted to a dollar limit, explained next.
DOLLAR LIMIT
Unless your car has a rated weight of more than 6,000 pounds, if it is a “luxury vehicle” (the cost depends on the year it was placed in service), your allowance for depreciation or first‐year expensing is limited to a dollar amount fixed by the IRS. Table 7.1 shows the dollar limits for passenger cars, which apply as well to light trucks and vans.
TABLE 7.1 Dollar Limit on Depreciation of Passenger Cars
| Date Car Placed in Service | 1st Year | 2nd Year | 3rd Year | 4th and Later Years |
|---|---|---|---|---|
| 2022 | $19,200* | $18,000 | $10,800 | $6,460 |
| 2021 | 18,200* | 16,400 | 9,800 | 5,860 |
| 2019–2020 | 18,100* | 16,100 | 9,700 | 5,760 |
| 2018 | 18,000* | 16,000 | 9,600 | 5,760 |
| 2012 through 2017 | 11,160** | 5,100 | 3,050 | 1,875 |
* $8,000 less if you elect not to use bonus depreciation.
** $3,160 if the car does not qualify for bonus depreciation (i.e., it is a used car).
For 2022, the same dollar limits for passenger cars listed in Table 7.1 apply to light trucks and vans. In prior years, these vehicles had slightly higher dollar limits than passenger cars.
The full amount of the dollar limit on depreciation applies only if the car is used 100% for business. If the car is used partly for business, you must allocate the dollar limit.
If the vehicle weighs more than 6,000 pounds but not more than 14,000 pounds, as is the case for a heavy SUV used in business, you can elect to expense its cost up to $27,000; the dollar limits in Table 7.1 do not apply in this case. In addition, you can claim normal depreciation for the vehicle without applying the dollar limits. Normal depreciation rates are 20% for the first year, 32% for the second year, 19.2% for the third year, 11.52% for the fourth and fifth years, and 5.76% for the sixth year.
Safe harbor method when claiming bonus depreciation. If you claim bonus depreciation for a vehicle, you can continue to claim depreciation on it only if you follow the rules set forth in Rev. Proc. 2019‐13. Essentially, this means figuring depreciation for years following the placed‐in‐service year using the percentage found in Appendix A of IRS Publication 946 (https://www.irs.gov/pub/irs-pdf/p946.pdf). Use Table A‐1 of Appendix A if the half‐year convention applies (the usual situation) or Table A‐2 if the mid‐quarter convention applies. The depreciation claimed each year is the lower of the amount figured using the applicable table or the dollar limit in Table 7.1.
Non‐personal use vehicles. Vans and trucks that are not suitable for personal use (e.g., they have permanent shelving, a front jump seat, or a permanent business sign) can be depreciated or expensed without any dollar limit.
SUBSTANTIATION
You must keep good records to back up your deduction for business use of your car. If you fail to do so, you can lose some or all of your deduction. Here's what your records should show:
- Mileage (your odometer reading at the start and end of each trip for business purposes). A court has indicated that you cannot merely note the length of the trip (e.g., 10 miles) but must record the actual odometer readings for the trip.
- Date, destination, and purpose for the trip (when you used your car, the customers or clients you visited, and the reason for taking the trip).
- Costs for gas, oil, and other car‐related expenses. Note: If you claim the standard mileage rate, you do not have to keep track of these costs.
Planning Tips
At the start and end of the year, note your odometer reading in your records. Then use a diary, logbook, handheld computer, or other device to record your business mileage throughout the year. Knowing your annual mileage and what part of it represents your business mileage will allow you to properly allocate your car expenses.
You can simplify your recordkeeping for car use with a method called “sampling.” This allows you to keep records for only a part of the year and then extrapolate the business mileage for the entire year. You can use this method only if the portion of the year in which you kept records (e.g., the first quarter of the year) is representative of car use throughout the year.
For more details and strategies for deducting the expenses of using your car for business, see J.K. Lasser's Small Business Taxes 2023.
Pitfalls
If you are an employee and drive your vehicle on company business, you cannot take any deduction for your costs. This is so, whether you own or lease your vehicle.
If you own your car and you want to use the IRS standard mileage rate, you must elect to do so in the first year of use. Otherwise you are limited to deducting your actual expenses. For example, if you bought and used your car for business in 2021 and used the actual expense method for claiming a deduction for business use, you cannot use the IRS standard mileage rate in 2022 for this car.
If you lease your car and claim a deduction under the actual expense method, you may have to include a phantom amount in income. This is called the inclusion amount and is designed to equate write‐offs for leased cars with those that are purchased. The inclusion amount is generally a modest figure that you take from an IRS table created for this purpose. You include only the portion of the inclusion amount related to your car use. For example, if you use your car only 25% for business, you include only 25% of the applicable inclusion amount. Table 7.2 shows you some sample inclusion amounts for passenger cars (for 2022 the same amounts apply to light trucks and vans that you lease).
Inclusion amounts for vehicles leased prior to 2022 can be found in IRS Publication 463, Travel, Gift, and Car Expenses.
Where to Claim the Benefit
As a self‐employed person, if you use your car for both business and personal purposes, you can deduct expenses related to your business use on Schedule C of Form 1040 or 1040‐SR.
If you own your car and are required to file Form 4562, Depreciation and Amortization (you are claiming depreciation on property placed in service in 2022), complete Part V of the form. Be sure to answer the question about whether you have written evidence of your claimed use.
TABLE 7.2 Sample Inclusion Amounts for Cars First Leased in 2022*
| Fair Market Value | Tax Year during Lease | |||||
|---|---|---|---|---|---|---|
| Over | Not Over | 1 | 2 | 3 | 4 | Later |
| $ 56,000 | $ 57,000 | 1 | 1 | 1 | 2 | 2 |
| 58,000 | 59,000 | 3 | 7 | 9 | 11 | 13 |
| 60,000 | 62,000 | 6 | 13 | 20 | 23 | 28 |
| 70,000 | 72,000 | 19 | 40 | 61 | 72 | 83 |
| 80,000 | 85,000 | 33 | 72 | 107 | 128 | 149 |
| 90,000 | 95,000 | 45 | 100 | 147 | 177 | 204 |
| 100,000 | 110,000 | 61 | 133 | 198 | 238 | 274 |
* Figures for all inclusion amounts are at https://www.irs.gov/pub/irs-drop/rp-22-17.pdf.
If you are not required to file Form 4562, you must answer the questions about your car use in Part IV of Schedule C. These questions concern your mileage for business and personal use and whether you have written evidence to support your deduction.
Employer‐Provided Car
Perhaps one of the most helpful employee benefits is the so‐called company car, which means that the business pays for a car you are allowed to use not only for business travel but also for personal purposes. The extent, if any, to which you are taxed on use of a company car depends on several factors, including how you are using the car.
Benefit 
If you use a company‐owned car only on company business, you are not taxed on this use of the company car because it is for business (it is tax‐free income to you). Similarly, if you use a certain type of company vehicle for personal use, you are not taxed on this benefit because the IRS views you as having limited personal use (it is tax‐free income to you). Such vehicles include: ambulances; hearses; flatbed trucks; dump, garbage, and refrigerated trucks; one‐passenger delivery trucks (even if there is a folding jump seat); tractors and other farm equipment; and forklifts. The same exclusion from income applies to vehicles where personal use is restricted or authorized only by a government authority: school buses, passenger buses, moving vans, and police and fire vehicles (including unmarked cars).
Unfortunately, if you are given unfettered use of a company‐owned car that you use for personal purposes, you are taxed on this personal use. The value of this use is reported on your Form W‐2.
If you are a full‐time car salesperson who is allowed to use demonstration cars for personal use, you are not taxed on this benefit (it is tax‐free income to you), provided there are restrictions on personal use. For example, personal use after normal business hours might be restricted to a 75‐mile radius of the dealer's sales office or you might not be allowed to drive family members or use the car for vacation trips.
In 2018 through 2025, if you are an employee you can't claim any deduction for business driving of your personal vehicle. Similarly, if your employer provides you with a vehicle and chooses to include all of its use by you (business and personal) as compensation, you cannot deduct the business driving on your return.
Condition
To fully exclude the value of using a company car, your personal use must be restricted or the company vehicle must be one of those listed earlier.
Planning Tip
Your employer is not required to withhold income taxes on your personal use of a company car. If there is no withholding for car use and you have not paid enough taxes throughout the year by means of withholding or estimated tax payments, you may wind up owing taxes at the end of the year. You may wish to voluntarily increase your withholding if you know that your employer will not withhold taxes for your car use to avoid the problem. Complete a new Form W‐4 and give it to your employer to increase your withholding.
Pitfalls
As explained earlier, for 2018 through 2025, you cannot deduct any business driving on your personal tax return.
Where to Claim the Benefit
If you are not taxed on using the company car (i.e., your employer does not report it on your Form W‐2), you do not have to report anything on your return.
If your employer reports only the actual value of your personal use of a company car, again you do not have to do anything on your return. This income is included in your compensation and reported as such on your return.
Vehicle Registration Fees
One way in which states raise revenues is through the fees they charge for certain activities, including registering cars and other vehicles. The cost of registration, however, may be deductible under certain conditions.
Benefit
The state registration fees you pay for your vehicle may be deductible. If your car is used only for personal purposes and you itemize deductions, you can deduct auto registration fees based on the value of the car as a state personal property tax if certain conditions are met. You must itemize your deductions to be able to deduct this expense and your overall deduction for state and local taxes (SALT) is subject to a $10,000 overall cap ($5,000 if you're married filing separately).
Conditions
To deduct auto registration fees as a state personal property tax, you must meet all 3 requirements:
- The fee is an ad valorem tax. This means the fee is based on a percentage of the car's value, for example, 1% of the value. Table 7.3 lists the states that satisfy this requirement. Some of these states don't impose the tax, but counties within them do.
- The fee is imposed on an annual basis, even though it is collected more or less frequently.
- The fee is imposed on personal property.
- The fee, plus your other state and local taxes, does not exceed $10,000 ($5,000 if you are married filing separately).
If the tax or fee is based on weight, model, year, or horsepower, it is not deductible. But if the tax is based on both value and another factor, the portion based on value is deductible.
| Alabama | Michigan |
| Arizona | Minnesota |
| Arkansas | Mississippi |
| California | Missouri |
| Colorado | Montana |
| Connecticut | Nebraska |
| Georgia** | Nevada |
| Indiana | New Hampshire |
| Iowa | North Carolina |
| Kansas | Rhode Island |
| Kentucky | South Carolina |
| Louisiana | Virginia |
| Maine | West Virginia |
| Massachusetts | Wyoming |
* In some states there may be county‐imposed ad valorem taxes instead of or in addition to state taxes.
** One‐time title ad valorem tax.
Planning Tip
If you have questions about whether your state's registration fee is deductible in whole or in part, contact your state tax authority.
Pitfall
There is no downside to deducting auto registration fees as a personal property tax if you are eligible to do so. However, it is subject to the $10,000 overall limit for itemizing state and local taxes (the SALT cap).
Where to Claim the Benefit
If you are deducting auto registration fees on your personal car as a state personal property tax, you must file Schedule A of Form 1040 or 1040‐SR.
Car Accidents and Other Car‐Related Problems
According to the U.S. Department of Transportation, there were about 6.7 million motor vehicle accidents in the United States in 2019 (the most recent year for statistics). Whether a car is partially damaged or totaled, an owner may have out‐of‐pocket costs. These may be limited to the deductible or may be a greater amount. The tax law may allow for a write‐off, even if the car is used exclusively for personal reasons and not at all for business.
For 2018 through 2025, you cannot deduct any property loss from a car accident or as a result of a basic casualty event, such as a fire or storm. But if your car is damaged or destroyed in a federally‐declared disaster, you may have a deductible loss (see Chapter 12).
Donating Your Car
If you donate your car to a tax‐exempt organization, you may be entitled to claim a deduction for the car's fair market value. For more details, see Chapter 6.
Credit for Plug‐In Electric Drive Vehicles
You can claim a tax credit for buying a plug‐in electric drive vehicle. The credit applies whether you use the vehicle for personal driving, business driving, or a combination of both. There is a tax credit for certain 4‐wheel vehicles. And starting in 2023, the title of the credit for electric and fuel cell vehicles is changed to the clean vehicle credit, along with other changes.
Benefit 
You can reduce your tax bill for 2022 by claiming a tax credit of between $2,500 and $7,500 for the purchase of a 4‐wheel plug‐in electric vehicle. The amount of the credit does not depend on the weight of the vehicle. Instead, it depends on battery power. (The credit is reduced for certain vehicles; see Planning Tips below.) A minimum credit of $2,500 applies to a vehicle with a battery capacity of 4 but less than 5 kilowatt hours. The base credit amount of $2,500 is increased by $417 for a vehicle drawing propulsion energy from a battery with at least 5 kilowatt hours of capacity, plus $417 for each additional kilowatt hour of capacity in excess of 5 kilowatt hours, up to a maximum of $5,000 (for a total credit limit of $7,500).
Conditions
The credit applies to vehicles with a minimum of 4 wheels manufactured for use on public streets (i.e., have a speed of at least 35 mph and require state tags) and roads that are propelled by a battery having a capacity of at least 4 kilowatt hours. The vehicle must weigh less than 14,000 pounds. For vehicles placed in service on or after August 16, 2022, there is a “final assembly requirement,” which means the final assembly occurred in North America. The Department of Energy has a list of vehicles that may meet this requirement at https://afdc.energy.gov/laws/electric-vehicles-for-tax-credit.
Planning Tips
The tax credit can be used to offset both the regular tax and the alternative minimum tax.
In addition to this federal income tax credit, you may be eligible for state‐level tax breaks on sales and income taxes. Check with your state tax department for details or go to www.afdc.energy.gov/laws/ and click on your state.
For 2022, when a manufacturer has sold more than 200,000 4‐wheel plug‐in vehicles for use in the United States after 2009, the credit limit is phased out (50% credit in the 2 quarters after the 200,000 vehicle limit is reached and 25% in the next 2 quarters). Thus, anyone interested in purchasing a plug‐in electric vehicle should monitor these sales figures (the dealer should be able to provide information) and not miss the opportunity to claim the full credit. For example, both Tesla and GM passed the 200,000‐vehicle mark. As a result, there is no credit allowed for the purchase of either type of vehicle in 2022. Toyota passed the mark in June 2022, so a reduced credit applies for a vehicle purchased in the fourth quarter of the year.
For links and resources for plug‐in electric vehicles, go to FuelEconomy.gov (www.fueleconomy.gov/feg/taxevb.shtml).
Pitfall
Vehicles bought and placed in service on or after August 16, 2022, must meet a final assembly requirement to qualify for the credit. If you bought a vehicle before this date but took possession of it on or after this date, it is exempt from the final assembly requirement.
Where to Claim the Credit
If the vehicle is used for personal driving, then the credit is reported on Form 8834, Qualified Electric Vehicle Credit, and entered on Schedule 3 of Form 1040 or 1040‐SR.
If the vehicle is used for business driving, then the credit is part of the general business credit and subject to limitations. The same form used for personal driving is used to figure the credit and then the business portion is entered on Form 3800, General Business Credit; the net general business credit is then entered on Schedule 3 of Form 1040 or 1040‐SR.