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Is Buying a Car Tax Deductible?

202303 can deduct car tax refund jpg Car tax deduction | Cars.com illustration by Paul Dolan

Benjamin Franklin astutely noted that the only certainties in this world are death and taxes; if you bought a vehicle last year, you might be curious if a tax deduction can lessen the pain from the latter. There are several scenarios where shoppers can qualify for a tax deduction or a tax credit for a vehicle purchase. These include buying and driving the vehicle for business use or buying an eligible all-electric or plug-in hybrid vehicle.

Related: Leased and Used Electric Vehicles Now Qualify for Federal Tax Credits

You Bought a Car for Business

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According to Mark Steber, chief tax information officer at Jackson Hewitt, you can deduct your vehicle purchase as long as it’s for business use. A vehicle purchase made solely for personal use will not be eligible. “Car purchases can be deductible for self-employed taxpayers who are using their vehicle for business use,” wrote Steber in an email to Cars.com. “The purchase can be deducted using a limited cost factor, percentage of business use and depreciation. Some electric vehicles can also be eligible for a tax deduction, but a standard vehicle purchase is not tax deductible.”

Deducting Operating Costs

A car’s operating costs can be deducted even if you split the use of the car between business and personal driving, but you will need to separate and track the business-related usage. You can deduct the operating costs of using the car for business or charitable pursuits via the standard mileage rate determined by the IRS or your actual vehicle expenses. For example, the standard mileage rate for the cost of operating your vehicle in 2022 was 58.5 cents per mile from Jan. 1 through June 30, and 62.5 cents per mile from July 1 through Dec. 31. This method doesn’t demand as much record keeping as the actual vehicle expense method since it only requires you to track the mileage driven for business use and the business purpose for the travel; a vehicle’s depreciation is already factored into this rate.

Alternatively, you can use the actual expense method, which separates out all the costs of owning and driving the vehicle such as depreciation, fuel, oil, tolls, insurance payments, registration fees and repairs. In this case, you will need to keep a detailed log and collect the receipts of all business-related expenses. Once you add up the operating expenses, you’ll multiply the total by the percentage of miles driven for business use. According to TurboTax, one method may yield a more advantageous tax return one year, while the other may win out the next. You can calculate your operating costs using both methods to decide which one is best, but note that you must use the standard mileage rate method in the first year that you use the vehicle for business if you want to use it in subsequent years.

Tax Deductions for Rideshare, Delivery Drivers

The growth of the gig economy has enabled more car owners to use their vehicles for personal and business driving. Examples include driving for rideshare companies like Lyft and Uber or part-time delivery services like Amazon Flex. Drivers for these services are usually not direct employees of the company but instead are self-employed independent contractors. This means that the onus falls on the vehicle owner to file for a tax deduction.

Drivers can choose from one of the aforementioned vehicle tax deduction options (standard mileage or actual expenses) and should keep thorough records of all business-related receipts, mileage logs and other related documents; there are a variety of apps available for gig workers that help to organize and track expenses, which can be especially helpful during tax season.

You Bought an EV

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An EV or PHEV purchase can also shrink your IOU to Uncle Sam in the form of a tax credit for eligible models and income levels. While a tax deduction reduces the amount of your taxable income, a tax credit directly reduces the amount of taxes you owe or increases your tax refund.

Following the Inflation Reduction Act’s overhaul of the federal EV tax credit rules, the criteria to receive the credit have become more stringent for eligible models and income levels for EVs purchased in 2023. The changes also removed the sales caps for automakers like Tesla and GM and extended credit eligibility to used electric cars. However, if you bought an EV in 2022 and are looking to claim the credit on your upcoming tax return, the following eligibility rules apply:

“To qualify for the credit, the vehicle must be new, used for personal use and primarily used in the U.S.” notes Steber. “There are also qualifications for the vehicle: [it must] have an external charging source (a cord or a plug for a cord); a gross vehicle weight rating of less than 14,000 pounds; and be made by a manufacturer who hasn’t sold more than 200,000 EVs in the U.S. Additionally, vehicles purchased after Aug. 16, 2022, and before Jan. 1, 2023, must have final assembly in North America (50 states and D.C.), Puerto Rico, Canada or Mexico.”

If you purchased a qualifying new EV in 2022, you can claim the tax credit through IRS Form 8936 with your tax return.

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Former News Editor Jane Ulitskaya joined the Cars.com team in 2021, and her areas of focus included researching and reporting on vehicle pricing, inventory and auto finance trends. Email Jane Ulitskaya

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