Choosing Between Standard Mileage and Actual Cost Methods
When deducting vehicle expenses for business use, taxpayers have two primary options:
- Standard mileage rate (cents-per-mile method) or the actual expense method. Under the cents-per-mile method, businesses multiply the IRS standard rate—70 cents per mile for 2025—by the number of business miles driven. This method is simpler and includes depreciation, fuel, maintenance, and insurance.
- Actual expense method allows taxpayers to deduct the business-use portion of actual expenses, including gas, oil, repairs, insurance, registration, lease payments, and depreciation (via Section 179 or bonus depreciation).
If you start using the cents-per-mile method in the first year the vehicle is placed in service, you generally cannot switch to the actual expense method for that vehicle in later years. This locks you into using the standard mileage rate for the life of that vehicle.
Section 179 Deduction for Vehicles in 2025
Section 179 allows businesses to deduct the full purchase price of qualifying equipment, including vehicles (with limitations) in the year they are placed in service. For 2025, the maximum Section 179 deduction is $1,250,000, with a phase-out threshold starting at $3,130,000 of total equipment purchases.
Passenger vehicles are subject to specific limits:
- Light vehicles (less than or equal to 6,000 lbs GVWR): The first-year Section 179 deduction is $12,200.
- Heavy SUVs and trucks (greater than 6,000 lbs but less than 14,000 lbs GVWR): These vehicles are capped at a $31,300 Section 179 deduction.
To qualify, the vehicle must be used more than 50% for business purposes.
Bonus Depreciation in 2025
After applying Section 179, businesses can use bonus depreciation to further deduct the cost of qualifying property. For 2025, the bonus depreciation rate is 40%. This means that after taking the Section 179 deduction, you can depreciate 40% of the remaining cost in the first year. Bonus depreciation is available for both new and used vehicles.
Accounting for Personal Use
If a vehicle is used for both business and personal purposes, only the business-use portion is deductible. Expenses must be allocated based on mileage or another reasonable method.
Example:
- Business-use portion: $60,000 × 60% = $36,000
- Section 179 deduction: Up to $31,300
- Remaining basis: $36,000 – $31,300 = $4,700
- Bonus depreciation: 40% of $4,700 = $1,880
- Total first-year deduction: $31,300 + $1,880 = $33,180
The remaining $2,820 would be depreciated over future years. If business use drops to 50% or less, prior deductions may be subject to recapture.
Reporting Personal Use as Income
When employees use company vehicles personally, the value of that use is considered a taxable fringe benefit and must be included in their income. The IRS permits calculation using:
- Annual Lease Value Method
- Cents-Per-Mile Method (same 70 cents rate)
Example:
An employee uses a company car with an annual lease value of $8,750. If 15% of the use is personal, the taxable benefit is $1,312.50. If the employer pays for fuel used during personal travel, an additional 5.5 cents per personal mile is added as a taxable fringe benefit. These amounts must be included in the employee’s W-2 income and are subject to standard income and employment taxes.
Final Thoughts
Business vehicle deductions can offer major tax advantages. Whether using the standard mileage rate or actual costs with Section 179 and bonus depreciation, it’s critical to:
• Use the vehicle more than 50% for business
• Keep detailed mileage and expense records. If audited, you’ll be asked for proof of business use.
• Accurately report any personal use of company vehicles.
For those interested, there are several apps available to track mileage. Forbes recently evaluated mileage apps and named the seven best: 7 Best Mileage Tracker Apps – Forbes Advisor
We can help choose the right method and maximize your deductions.
