Per Diem Rates from the U.S. General Services Administration
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Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").
The Actual Expense Method
Under the actual expense method, you deduct a vehicle's business-related operating expenses plus depreciation.
Examples of Operating Expenses
- Fuel
- Garage rent
- Insurance
- Interest on vehicle loan
- Parking fees
- Repairs and maintenance
- Tires
- Tolls
Interest on Vehicle Loan
Self-employed persons may deduct the business-related portion of car loan interest. To determine the deductible interest amount, you must know your business-use percentage. For example, if your annual business miles traveled was 24,000 and your total annual miles traveled was 60,000, your business-use percentage would be 40% (24,000/60,000). If your annual car loan interest was $500 you could deduct $200 (40% x $500). The remaining $300 is a nondeductible personal expense.
Sales Tax Paid for a Vehicle Used In Business
Sales tax is added to the purchase price (cost basis) of a vehicle used in a business. You may recover the total cost of the vehicle, including the sales tax, via depreciation deductions claimed on the vehicle.
Less than 100% Business Use:
If you use your vehicle less than 100% for business, you deduct the business related portion of the sales tax on Schedule C and the personal portion on Schedule A, if you itemize. On Schedule A, you may deduct either income taxes or general sales taxes, but not both.
Depreciation for Vehicles 6,000 Pounds or Less (passenger cars, trucks, SUVs, vans)
The annual depreciation deduction ceiling limits in the tables below apply to vehicles weight-rated by the manufacturer at 6,000 pounds or less unloaded (without passengers).
The tables below show the annual depreciation ceilings for passenger automobiles placed in service during calendar year 2021.
Table 1 includes first-year bonus depreciation. Table 2 excludes first-year bonus depreciation.
The Deduction Using MACRS Tables Can't Exceed the Annual Ceiling
If you figure your depreciation deduction under the half-year or mid-quarter convention MACRS table, or the straight line table, and it exceeds the annual ceiling shown in the tables below, your deduction is limited to the annual ceiling in the tables below, reduced by your personal use percentage.
Caution!
If you used the 100% bonus depreciation rule for vehicles placed in service in 2020 to increase your first-year depreciation deduction, you must use an IRS safe harbor to figure your deductions starting in 2021 (the second recovery year). See Revenue Procedure 2019-13 for an explanation.
The amounts shown in the tables below assume 100% business use. However, if business use is less than 100%, you must reduce the amount shown in these tables by your business-use percentage. For example, if your business-use percentage was 60%, your ceiling in Table 1, Year 1 would be $10,920 (60% x $18,200).
For a vehicle used more than 50% for business in 2021, the Table 1 first-year dollar limit includes an $8,000 bonus depreciation allowance, increasing the ceiling to $18,200 (the $10,200 ceiling in Table 2, which excludes bonus depreciation + $8,000 bonus depreciation).
Keep in mind, you must reduce the ceiling in theses tables by your personal-use percentage, unless you elect not to claim bonus depreciation in 2021 (if you elect not to claim bonus depreciation, attach a statement to your return explaining that your are electing out of taking bonus depreciation). If you elect out of taking bonus depreciation, the ceiling would be $10,200, as shown in Table 2, reduced by your personal use percentage.
The annual ceiling takes into account the following:
- Bonus depreciation
- First-year expensing (Section 179 deduction)
- MACRS depreciation
| TABLE 1 Depreciation Limitations for Passenger Automobiles Acquired After 9/27/2017 and Placed in Service During Calendar Year 2021 First-Year Bonus Depreciation Included |
|
|---|---|
| 1st Tax Year | $18,200 |
| 2nd Tax Year | $16,400 |
| 3rd Tax Year | $9,800 |
| Each Succeeding Year | $5,860 |
| TABLE 2 Depreciation Limitations for Passenger Automobiles Placed in Service During Calendar Year 2021. First-year Bonus Depreciation Not Included |
|
|---|---|
| 1st Tax Year | $10,200 |
| 2nd Tax Year | $16,400 |
| 3rd Tax Year | $9,800 |
| Each Succeeding Year | $5,860 |
Heavy SUVs, Trucks, and Vans Over 6,000 Pounds But Not More Than 14,000 Pounds
SUVs, trucks, and vans weight-rated by the manufacturer at more than 6,000 pounds gross vehicle weight are not subject to annual depreciation ceilings show in the tables below. However, first-year expensing (the Section 179 deduction) may be limited to $26,200 rather than the general expensing limit that applies to other property, which is $1,050,000 for 2021.
Note that the $26,200 first-year expensing limit applies to any four-wheeled vehicle primarily designed or which can be used to carry passengers over public thoroughfares and is weight-rated at more than 6,000 pounds but not more than 14,000 pounds gross vehicle weight.
To qualify for first-year expensing (section 179), the vehicle must be used more than 50% for business. If first-year expensing is not or cannot be elected, a full depreciation deduction using the MACRS rate is allowed with no dollar limit.
The $26,200 Expensing Limit Does Not Apply to the Following:
- Vehicles with seating for more than nine passengers behind the driver.
- Pickup trucks with an interior cargo bed at least six feet long that is an open area or is enclosed by a cap and not readily accessible to passengers.
- Cargo vans without rear seating and with no body sections protruding more than 30 inches ahead of the windshield.
TIP: Avoid the $26,200 first-year Expensing Limit by Claiming Bonus Depreciation Instead
As explained earlier, for vehicles weighing more than 6,000 pounds but not more than 14,000, while not subject to the depreciation ceilings shown in the tables below, are subject to a first-year expensing (Section 179) limit of $26,200.
So, if your vehicle qualifies for both bonus depreciation (section 168) and first-year expensing (section 179 deduction), you may choose not to use first-year expensing and use only bonus depreciation. By using only bonus depreciation you can avoid the $26,200 limit that applies to first-year expensing and deduct up to 100% of the cost off the vehicle!
For example, if in 2021 you purchased and placed in service an $80,000 truck and used it 100% of the time for business, you may deduct the full $80,000 cost in 2021 using 100% bonus depreciation. However, if you used the vehicle less than 100% for business, but more than 50%, you must reduce your deduction according to your business-use percentage. (You must use the vehicle at least 51% of time for business to use bonus depreciation.)
Lease payments
You May Have to Reduce Your Deduction
If you lease a vehicle, you may deduct your lease payments as a business expense. If you use the vehicle for business and personal purposes, only lease payments related to business use are deductible. Lease payments related to personal use of the vehicle are nondeductible personal expenses.
If in 2021 you lease a vehicle for a lease term of 30 days or more, you may have to indirectly include what's called an "inclusion" amount in your income for each year you lease a vehicle. This is done indirectly; you don't actually add the inclusion amount to your income, instead, you reduce your lease payment deduction by the inclusion amount listed in an IRS table (See IRS Publication 463 to determine the inclusion amount for various tax years).
This "inclusion" rule applies if you use the actual expense method for claiming your vehicle deduction and not if you use the standard mileage rate. For vehicles first leased in 2021, there's no inclusion amount if the fair market value of the vehicle at the start of the lease is $51,000 or less.
Tax Reporting
Use IRS Form 4562 to record bonus depreciation and other types of depreciation and amortization. Review the Instructions for Form 4562.