How to Deduct the Entire Cost of Your Next Vehicle

By Thomas Castelli, CPA | January 4, 2022

Who doesn’t want an excuse to buy another vehicle? There is nothing like telling your spouse that it’s necessary to buy that Porsche Cayenne you’ve been eyeing in order to reduce your tax bills.

That’s why in this Tax Smart Investor Newsletter we’re going to break down vehicle-related deductions and how you might be able to deduct the entire cost of your next vehicle purchase. 

The Two Methods You Can Use to Deduct Vehicle Related Expenses

As a landlord or business owner, you might use a vehicle for local business purposes such as traveling to and from a rental property, the bank, hardware store, and so on. There are generally two ways you can deduct vehicle-related expenses:

  1. Standard mileage deduction; or
  2. The actual expense method

Standard Mileage Deduction

The standard mileage rate is the simplest way to deduct vehicle-related expenses because it requires the least amount of tracking. Simply take the number of miles you drive for business and multiply it by the standard mileage rate to get your deduction. 

The standard deduction is 58.5 cents per mile in 2022 (it was 56 cents/mile in 2021).

Example

If you drive 6,000 miles for business in 2022, your deduction will be $3,510. If you’re in the 24% tax bracket that’s $842 in tax savings, and if you’re in the 37% tax bracket that would be $1,299 in tax savings.

Generally, taxpayers who use their vehicle less than 50% for business purposes will be just fine with the standard mileage deduction. 

The Actual Expense Method

Under the actual expense method, you can deduct the business portion of your vehicle-related expenses if it is used more than 50% for business purposes. (To determine your business usage of the vehicle, divide your business mileage for the year by the total miles you drive on the vehicle for the year).

These expenses can include but are not limited to gasoline, insurance, repairs and maintenance, registration fees, tolls, interest on car loans, and most importantly, depreciation.

The depreciation expense is key because certain vehicles (discussed in the next section) can carry a significant depreciation expense in the first year placed in service thanks to 100% bonus depreciation (in 2023 bonus depreciation drops from 100% to 80%.)

Example

In 2022 you purchase a Ford F150 for $50,000 and use it 75% for business purposes. This allows it to deduct $37,500 of its cost as a depreciation expense in 2022.

At the 24% tax bracket, that’s $9,000 in potential tax savings, and if you’re in the 37% tax bracket, that amounts to $13,875 in potential tax savings.

Many taxpayers will buy the vehicle towards year-end and only drive it for business purposes in order to maximize their business use and thus depreciation expense. If you do this, it’s possible to obtain 100% business use and deduct the vehicle’s entire cost in the year you acquire and place the vehicle into service. 

Note, regardless of its business use in the first year, you must use the vehicle more than 50% for business purposes in the subsequent 5 years, otherwise, you may face depreciation recapture.

What Vehicles Have the Best Benefits?

Generally, trucks, vans, and SUVs with a gross vehicle weight rating (GVWR) of more than 6,000 lbs will have the best benefits because they don’t have a first-year depreciation expense limit like passenger vehicles do. 

Below is a list of vehicles that are known to qualify. However, be sure to check with your car dealer and tax professional to ensure the specific vehicle you are purchasing qualifies. 

  • Audi
    • AUDI Q7 3.0L TDI
  • BMW
    • BMW X5 M
    • BMW X5 XDRIVE35I
    • BMW X6 M
    • BMW X6 XDRIVE35I
  • Buick
    • BUICK ENCLAVE 2WD
    • BUICK ENCLAVE 4WD
  • Cadillac
    • CADILLAC ESCALADE 2WD
    • CADILLAC ESCALADE AWD
    • CADILLAC ESCALADE HYBRID
    • CADILLAC XT5
    • CADILLAC XT6
  • Chevrolet
    • SILVERADO C1500
    • SILVERADO C1500
    • SILVERADO C2500
    • SILVERADO C3500
    • SILVERADO K1500
    • SILVERADO K1500
    • SILVERADO K2500
    • SILVERADO K3500
    • SUBURBAN C1500
    • SUBURBAN K1500
    • TAHOE 2WD LS
    • TAHOE 4WD LS
    • TAHOE HYBRID
    • TRAVERSE 2WD
    • TRAVERSE 4WD
  • Chrysler
    • Pacifica
    • Pacifica Hybrid
  • Dodge
    • DODGE DURANGO 2WD
    • DODGE DURANGO 4WD
    • DODGE GRAND CARAVAN
  • Ford
    • FORD EXPEDITION 2WD
    • FORD EXPEDITION 4WD
    • FORD EXPLORER 2WD
    • FORD EXPLORER 4WD
    • FORD F-150 and larger 2WD
    • FORD F-150 and larger 4WD
    • FORD FLEX AWD
  • GMC
    • GMC ACADIA 2WD
    • GMC ACADIA 4WD
    • GMC SIERRA C1500
    • GMC SIERRA C2500 HD
    • GMC SIERRA C3500 HD
    • GMC SIERRA C3500 HD
    • GMC SIERRA K1500
    • GMC SIERRA K2500 HD
    • GMC SIERRA K3500 HD
    • GMC YUKON 2WD
    • GMC YUKON 4WD
    • GMC YUKON HYBRID
    • GMC YUKON XL C1500
    • GMC YUKON XL K1500
  • Honda
    • PILOT 4WD
    • HONDA ODYSSEY
  • Infiniti
    • INFINITY QX80
    • INFINITY QX56
  • Jeep
    • JEEP GRAND CHEROKEE
  • Land Rover
    • RANGE ROVER 4WD
    • RANGE ROVER SPT
    • DISCOVERY
  • Lexus
    • LEXUS GX460
    • LEXUS LX570
  • Lincoln
    • LINCOLN MKT AWD
    • LINCOLN Navigator
  • Mercedes Benz
    • MERCEDES-BENZ G550
    • MERCEDES-BENZ G Class
    • MERCEDES-BENZ GL350 BLUETEC
    • MERCEDES-BENZ Metris & Sprinter
  • Nissan
    • NISSAN ARMADA 2WD
    • NISSAN ARMADA 4WD
    • NISSAN NV 1500 S V6
    • NISSAN NVP 3500 S V6
    • NISSAN TITAN 2WD S
  • Porsche
    • PORSCHE CAYENNE
  • Ram
    • RAM Promaster 1500-3500
    • RAM 1500+
  • Tesla
    • TESLA MODEL X
  • Toyota
    • TOYOTA 4RUNNER 2WD LTD
    • TOYOTA 4RUNNER 4WD LTD
    • TOYOTA LANDCRUISER
    • TOYOTA SEQUOIA 2WD LTD
    • TOYOTA SEQUOIA 4WD LTD
    • TOYOTA TUNDRA 2WD
    • TOYOTA TUNDRA 4WD
  • Volkswagen
    • VW TOUAREG HYBRID

Courtesy of Diminished Value of Georgia

The Bottom Line

If you purchase a qualifying vehicle and use it more than 50% for business purposes, you can generally deduct the portion of the vehicle’s cost used for business purposes in the first year thanks to 100% bonus depreciation.

The best way to maximize this deduction is to purchase the vehicle towards year-end and use it 100% for business purposes. Then for the next 5 years, you only have to use the vehicle more than 50% for business purposes.

While 100% bonus depreciation will be available in 2022, bonus depreciation starts to phase out by 20% each year from 2023-2026.

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About Thomas Castelli, CPA

Thomas is a Tax Strategist and real estate investor, who helps other real estate investors keep more of their hard-earned dollars in their pockets and out of the government's. His real-life real estate investing experience, combined with his ever-growing arsenal of hard-hitting tax strategies, allows him to see eye-to-eye with clients in ways an average CPA never could.