Automobile deductions

Easiest way

is to deduct a business use automobile using the mileage method. IRS allows 57.5¢/mile.

  • The auto mileage rate 2020 up to four cars at a time @ 57.5¢/mile (depreciation portion is 27¢, most of the remainder is based on insurance, repairs and fuel)
    • note that the medical & moving mileage rates are 17¢/mile (based mostly on fuel cost)
    • the charitable purposes mileage rate is 14¢/mile (this rate is fixed by law)
    • the military rate for airplane is $1.27 and for motorcycle is 54.5¢/mile and 17¢/mile for some other travel

A mileage log book

or diary is required to account for the business use of the vehicle. The IRS has strict requirements for business mileage deductions. For this reason you'll need to keep a thorough and accurate mileage log each year that you claim a deduction.

Your mileage log should include the starting mileage on your vehicle's odometer at the beginning of the year and its ending mileage at the conclusion of the year. Repair shop receipts often document the odometer mileage. Each time you use your vehicle for business purposes, you should record the following information:

  • The date (time) of your trip
  • Your starting point
  • Your destination
  • The business purpose of the trip (including who you are meeting with)
  • Optionally, the vehicle's starting mileage
  • Optionally, the vehicle's ending mileage
  • Tolls, parking and other trip-related costs

You can keep a mileage log in a notebook and update it by hand, or electronically using a spreadsheet template or use a mileage-tracking app.

The key is to update your records regularly. IRS requires that you to keep your old mileage logs on hand for three years from the date of filing the income tax return. If you are ever audited, one of the first things that the Examiner reviews is the mileage log book.

Leasing a vehicle

is a little more involved. For many taxpayers, they normally get a "closed-end lease" for three or more years and then turn it in. Taxpayers who lease a passenger automobile for use in their business can deduct the part of the lease payment that represents its business use. If the vehicle is used solely for business, the full cost of the lease is deductible. (Alternatively, the standard mileage rate may be deducted)

Lease inclusion amount

For passenger automobiles valued at more than $50,000, the lease payment deduction needs to be reduced or offset by an amount that is more-or-less equivalent to the limits on the depreciation deductions imposed on owners of those vehicles. This reduces an appropriate amount of the tax benefit of leasing a luxury car vs. purchasing one.

The taxpayer adds the lease inclusion amount to the taxable income (or reduces the expense) each year of the lease, by the dollar amount found in the table on page 6 here.

Purchasing a vehicle

Once purchased a business use vehicle needs to be depreciated. The rules here are very complex, and they are constantly changing from year-to-year. Rules differ if the vehicle is used less than 50% for business, and depending on the year first put into business use, and on the type, such as: luxury passenger automobile; luxury truck or van; light SUV; heavy SUV, pickup truck or van.

An "open-end lease" obligates the lessee to make a balloon payment at the end of the lease for the value of the vehicle at that time. This is an alternative form of financing the acquisition of a vehicle. Whether paid in cash or financed, the acquisition of the vehicle, puts the burden of depreciation on the taxpayer. The rules here are very complex, depending on the type of vehicle and its gross vehicle weight and these rules can change each year.

Passenger automobiles

(Rev. Proc. 2020-37). For these purposes, passenger automobiles include trucks and vans. The amounts in the revenue procedure are inflation-adjusted as required by Sec. 280F(d)(7), using the automobile component of the chained consumer price index for all urban consumers (C-CPI-U).

For passenger automobiles to which the Sec. 168(k) additional (bonus) first-year depreciation deduction applies and that are acquired after Sept. 27, 2017, and placed in service during calendar year 2020, the depreciation limit under Sec. 280F(d)(7) is $18,100 for the first tax year; $16,100 for the second tax year; $9,700 for the third tax year; and $5,760 for each succeeding year. Under Sec. 168(k)(8)(D)(i), no bonus depreciation is allowed for property acquired before Sept. 28, 2017, and placed in service after 2019.

Luxury vehicles

have four wheels, are used mainly on public motorways and have an unloaded gross weight under 6,001 pounds. For passenger automobiles placed in service in 2020 for which no Sec. 168(k) additional (bonus) first-year depreciation deduction applies, the depreciation limit under Sec. 280F(d)(7) is $10,100 for the first tax year; $16,100 for the second tax year; $9,700 for the third tax year; and $5,760 for each succeeding year.

Heavy vehicles

Qualify for 100% first-year bonus depreciation on the business portion. To qualify as a “heavy” vehicle, an SUV, pickup truck or van must have a manufacturer's gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify the GVWR of a vehicle by looking at the manufacturer's label, which is usually found on the inside edge of the driver's side door where the door hinges meet the frame.