If your business used one or more vehicles during 2025, you may be eligible for valuable tax deductions when filing your 2025 income tax return. Businesses are generally allowed to deduct costs related to the business use of vehicles, including operating expenses and depreciation.
However, calculating the deduction can be complex. The amount you can claim depends on factors such as the vehicle’s weight, how much it’s used for business versus personal purposes, and whether you choose the actual expense method or the standard mileage rate.
Deducting Actual Vehicle Expenses and Depreciation
When a vehicle is first placed in service for business purposes, you have the option to deduct actual operating expenses or use the standard mileage deduction.
Under the actual expense method, deductible costs may include:
- Fuel and oil
- Tires
- Insurance
- Maintenance and repairs
- Licensing fees
- Vehicle registration costs
To claim these deductions, you must maintain accurate records and documentation of all related expenses.
Depreciating the Vehicle
If you choose the actual expense method, you can also claim depreciation on the vehicle. Depreciation allows you to deduct a portion of the purchase price over several years.
Generally, depreciation is calculated over six years using the following percentages:
- Year 1 — 20%
- Year 2 — 32%
- Year 3 — 19.2%
- Year 4 — 11.52%
- Year 5 — 11.52%
- Year 6 — 5.76%
If the vehicle is used 50% or less for business purposes, the IRS requires using the straight-line depreciation method instead. Under this method, depreciation is spread more evenly:
- 10% in Years 1 and 6
- 20% in Years 2 through 5
Depreciation Limits for Passenger Vehicles
For passenger vehicles, the IRS places annual limits on depreciation deductions, often referred to as “luxury auto” limits. These limits are adjusted periodically for inflation.
For vehicles first used in 2025, the general depreciation caps are:
- Year 1 — $20,200 ($12,200 without first-year bonus depreciation)
- Year 2 — $19,600
- Year 3 — $11,800
- Each additional year until fully depreciated — $7,060
If the vehicle is also used for personal purposes, these limits must be reduced based on the percentage of business use.
Special Rules for Larger Vehicles
Heavier vehicles, such as large SUVs, pickups, and vans, may qualify for more favorable depreciation rules.
For example:
- Vehicles with a gross vehicle weight rating (GVWR) above 14,000 pounds may qualify for 100% bonus depreciation or the Section 179 deduction, which has a $2.5 million limit for 2025.
- Vehicles with a GVWR between 6,000 and 14,000 pounds (commonly SUVs) may qualify for a Section 179 deduction of up to $31,300.
To take advantage of these enhanced deductions, the vehicle must be used more than 50% for business purposes.
The Standard Mileage Method
Instead of tracking actual expenses, many business owners opt for the standard mileage rate.
For 2025, the IRS mileage rate for business use is 70 cents per mile. This rate will increase to 72.5 cents per mile in 2026.
The rate applies to:
- Gas-powered vehicles
- Diesel vehicles
- Electric vehicles
- Hybrid vehicles
Because depreciation is already included in the mileage rate, you cannot claim both depreciation and the mileage deduction for the same vehicle.
The IRS reviews operating costs each year — including fuel, repairs, maintenance, and depreciation — to determine the standard rate. In rare cases, the IRS may adjust the rate midyear if fuel prices change significantly.
Recordkeeping Requirements
Even when using the mileage method, you must keep records that include:
- Date of each trip
- Destination
- Business purpose
- Miles driven for business
Choosing the Best Deduction Method
Before selecting a deduction method, it’s important to evaluate your specific circumstances.
If your vehicle was placed in service in 2025, you may choose either the actual expense method or the mileage rate.
However, if you begin using the actual expense method, you generally cannot switch to the mileage method in later years for that vehicle.
If you start with the mileage method, you may switch to the actual expense method in a future year, but you will be limited to straight-line depreciation.
What If Your Business Leases a Vehicle?
Businesses that lease vehicles may also qualify for deductions, though the rules differ from those for purchased vehicles. Leasing deductions typically involve different calculations and limitations.
Because these rules can vary, it’s helpful to review your situation with a tax professional to determine the most beneficial approach.
Plan Ahead for Vehicle Tax Savings
Vehicle deductions can significantly reduce taxable income for many businesses, but careful planning and accurate recordkeeping are essential.
If you have questions about claiming vehicle expenses on your 2025 tax return or want to plan ahead for 2026 deductions, consulting a tax professional can help ensure you maximize your available benefits while staying compliant with IRS regulations.