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Maximizing Deductions for Business-Use Vehicles

October 20, 2023



Tracking expenses related to business-use vehicles can be a time-consuming task. However, the optional standard mileage rates for business vehicles can simplify the process, helping you reduce the burden. Businesses that operate up to four vehicles at the same time can use the standard mileage rate, avoiding the need to keep detailed records of depreciation, gas, and repairs.

Standard Business Mileage Rate for 2023

The standard business mileage rate for 2023 is 65.5 cents-per-mile. The business rate reflects, among other things, gasoline, depreciation, and maintenance costs each year. In comparison, the rate for 2022 is 58.5 cents-per-mile.

Four or More Vehicles

Businesses using no more than four vehicles for business purposes can use the business standard mileage rate. Generally, the IRS prohibits taxpayers from using the business standard mileage rate to compute the deductible expenses of five or more vehicles the taxpayer owns or leases and uses simultaneously, such as in a fleet operation.

Depreciation Component

The depreciation component of the business standard mileage rate is 28 cents-per-mile for 2023. Businesses that use the standard mileage rate are not allowed to take actual depreciation deduction amounts, even if they exceed the depreciation component. Before deciding to use the standard mileage rate, it is advisable to assess whether the actual expense method, which includes actual depreciation, might be beneficial. This is especially important in cases where Code Section 179 expensing and/or bonus depreciation are available.

Luxury Vehicle Caps

Congress established the “luxury vehicle” limits to prevent excessive deductions for vehicles selling above a certain price point. And these limits aim to balance write-offs for vehicles with premium costs. For example, the maximum depreciation deduction for passenger automobiles and for trucks and vans first placed in service in 2023 (for which no first-year bonus depreciation applies) is $12,200 for the first year and $19,500 for the second year.

Bonus Depreciation

Bonus depreciation may be added to the available first-year deduction allowed on the purchase of a vehicle used for business if certain criteria are met. To qualify, the vehicle must be new and placed in service before January 1, 2027. For most vehicles (those that are not fully depreciated in their first-year after applying the cap), business taxpayers claiming bonus depreciation are allowed an additional $8,000 in first year depreciation over and above the $12,200 first-year limit.

Section 179 Deduction

A new or used vehicle may qualify for expensing under Code Sec. 179 in the tax year that it is placed in service if business use of the vehicle exceeds 50 percent. However, the sum of the section 179 expense deduction and regular first-year depreciation deduction (including any bonus depreciation) cannot exceed the applicable first-year depreciation cap for that vehicle.

Personal and Business Use

If you use your business vehicle for personal trips (including commuting back and forth from home and your primary business location) you must pro-rate your deduction to exclude the percentage of personal use. The critical threshold here is 50 percent. As long as you use your vehicle more than 50 percent for business during the year, you can pro-rate your deduction. You also have the option of using the standard mileage rate, based on miles of business use for the year times the prescribed rate.

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