The Short Answer: It Depends on How You Got the Car
"Can I deduct my car payment?" is one of the most common tax questions business owners and self-employed individuals ask. The answer is not as simple as yes or no, because the IRS treats loan payments and lease payments very differently.
Here is the clear breakdown of what you can and cannot deduct, depending on whether you bought or leased your vehicle.
If You Bought the Car (Loan Payment)
You cannot deduct the monthly loan payment itself. This surprises a lot of people, but the logic makes sense once you understand it: the loan payment is a combination of principal (paying for the car) and interest (paying for the financing). The IRS already provides a way to deduct the cost of the car through depreciation.
What you can deduct:
- Depreciation: The cost of the vehicle deducted over time (or accelerated through Section 179 and bonus depreciation)
- Loan interest: The interest portion of your car payment is deductible as a business expense
- Operating expenses: Gas, insurance, maintenance, repairs, registration, tolls, and parking (proportional to business use)
So while you cannot write off the $700/month loan payment directly, you can deduct the vehicle's cost through depreciation and the interest through the loan interest deduction. In many cases, the total deduction in year one (especially with Section 179) exceeds what you would have deducted through monthly payment deductions.
If You Leased the Car
With a lease, the deduction is much simpler: you deduct the actual lease payment (proportional to your business-use percentage) as a business expense each month.
If your lease payment is $500/month and you use the car 80% for business, you deduct $400/month ($4,800/year). That is it. No depreciation schedules, no separating principal from interest.
This simplicity is one reason many business owners prefer leasing for business use. The deduction is clean, predictable, and easy to document.
Method 1: Actual Expense Method
Under the actual expense method, you add up all vehicle-related costs for the year and deduct the business-use percentage:
- Lease payments or depreciation (not both)
- Gasoline or charging costs
- Insurance
- Maintenance and repairs
- Registration fees
- Parking and tolls
This method requires more record-keeping but often produces a larger deduction, especially for expensive vehicles.
Method 2: Standard Mileage Rate
The standard mileage rate lets you deduct a flat amount per business mile driven (the IRS updates this rate annually). You simply multiply your business miles by the rate.
This method is simpler but comes with restrictions:
- You must choose it in the first year you use the vehicle for business
- You cannot switch to actual expenses later (for leased vehicles)
- You cannot deduct actual operating costs separately (they are included in the rate)
- It is not available if you use five or more vehicles simultaneously for business
For most business owners with moderate vehicle expenses, the actual expense method produces a larger deduction. For those with simple situations and lower vehicle costs, the standard mileage rate is easier to manage.
The Mileage Log: Your Most Important Document
Regardless of which method you use, you need a mileage log. The IRS requires contemporaneous records of your business driving, including:
- Date of each trip
- Starting and ending location
- Business purpose
- Miles driven
Without a mileage log, your entire vehicle deduction is at risk in an audit. Use an app (MileIQ, Everlance, Stride) or a simple notebook. The important thing is consistency.
What Does NOT Count as Deductible Driving
- Commuting from home to your regular office (this is personal, not business)
- Personal errands, even during the workday
- Driving to lunch unless it involves a business meeting
What does count:
- Driving between business locations
- Driving to meet clients, vendors, or partners
- Driving to temporary work locations
- Driving from a home office to any business location (if your home is your principal place of business)
Which Is Better for Your Situation?
Here is a quick decision framework:
- If you drive a lot for business and your vehicle is modestly priced: standard mileage rate may be simplest
- If you have an expensive vehicle with high lease payments: actual expense method likely wins
- If you bought a heavy vehicle (over 6,000 lbs): actual expense with Section 179 is almost always best
- If you want simplicity and your vehicle is used 50-70% for business: standard mileage rate is easier
What Vantage Does Differently
We help business owners structure their vehicle acquisition (lease or purchase) to maximize the deduction that makes sense for their tax situation. We are not accountants, but we know the vehicle side of the equation inside and out. We find the best deal on the right vehicle and coordinate with your accountant on the structure.
Get your free quote in under 5 minutes and let us know how you use your vehicle for business. We will recommend the best approach. No spam. No pressure. Unsubscribe anytime.
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