Who can deduct car expenses on their tax return? The answer depends on each taxpayer’s circumstances. Some taxpayers who might have previously deducted car costs on their tax return may be able to do it again while others cannot.
Are you able to deduct car expenses on your tax return? Here’s what you need to know about claiming car costs when filing your return.
Can I Deduct Car Expenses on My Tax Returns?
The short answer is yes but only for business purposes and business use of the car. Taxpayers cannot claim personal use of the car on their tax returns.
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How Do I Deduct Car Costs for Business Expenses?
Taxpayers may deduct car expenses using one of two methods, said Armine Alajian, CPA and founder of Alajian Group. They may either claim mileage or actual cost — whichever is higher — of their personal vehicle for business purposes only or buy a car used solely for business. The car used for business purposes becomes a business-only asset that a taxpayer can claim depreciation for. Alajian said taxpayers can claim one or the other, but not both.
What if your vehicle is also for personal use? Alajian said you have to determine how much is used for your business as compared to personal use and calculate mileage or actual cost that way.
When Is a Car Purchase Tax Deductible?
Car purchases can be deductible for self-employed taxpayers who use their vehicles for business use, said Mark Steber, chief tax information officer at Jackson Hewitt Tax Services.
“The purchase can be deducted using a limited cost factor, percentage of business use and depreciation,” Steber said. “Some electric vehicles can also be eligible for a tax deduction, but a standard vehicle purchase is not tax deductible.”
What Should I Know About Electric Vehicle (EV) Tax Credits?
Taxpayers who buy an electric car may be eligible for a federal tax credit and a state tax credit if this credit is offered in your state. Keep in mind this isn’t a refund. Rather, Alajian said it is a credit that will help lower your tax burden.
Those who want to claim this credit when filing their income tax return should be mindful of the eligibility requirements.
“For tax filing in 2023, it’s worth $2,500 to $7,500 depending on the car’s battery capacity, the car must weigh less than 14,000 pounds, used or leased cars don’t qualify and credits are reduced and phased out after a manufacturer sells a certain number of EVs,” Alajian said.
To determine which EVs qualify for this tax credit, the IRS provides a list of qualifying vehicles for taxpayers to use as research. Additionally, Alajian recommends looking at the rules for the 2022 tax year when determining if you qualify for an EV credit this tax season. The Inflation Reduction Act in place for the 2023 tax year has changed some of these rules.
Can Ride-Share Drivers Claim Car Costs?
If you drive for a ride-share like Uber or Lyft, you can claim car costs when filing as a self-employed taxpayer.
Steber said there are a variety of tax deductions taxpayers can claim related to their vehicle expenses. Some of these include the following:
- Mileage. To do this, Steber recommends keeping track of your miles while you’re working and the total miles put on the car as of Dec. 31 each year. “In essence, you can deduct miles for the miles you drove to your passenger, between passengers and your drive home,” Steber said.
- Smartphone. You can expense the cost of your smartphone, monthly fees with the carrier and accessories needed for ride-share drives, like car mounts and chargers.
- Refreshments and other items. Do you provide passengers with bottled water, snacks or phone chargers? Steber said ride-share drivers may claim these goods as deductions.
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