Vehicle Purchases & Tax Incentives: Maximizing Your Business Deductions

Purchasing or leasing a vehicle for business can provide significant tax benefits, but the type of vehicle, how it’s used, and how it’s acquired all impact what deductions and credits are available. Understanding these differences can help business owners strategically lower tax liabilities and maximize deductions.

This guide will break down how vehicle purchases affect taxes, key tax incentives like Section 179 and bonus depreciation, and how to decide between leasing vs. purchasing to optimize tax savings.

How Can Vehicle Purchases Impact Taxes?

When a business buys or leases a vehicle, it can affect taxes in several ways:

1. Deductions vs. Credits – Some tax benefits allow businesses to deduct expenses (reducing taxable income), while others offer tax credits (directly reducing tax liability).
2. New vs. Used – Some tax incentives apply only to new vehicles, while others allow used vehicles to qualify.
3. Owned vs. Leased – Purchased vehicles may qualify for depreciation deductions, while leased vehicles typically allow for deducting lease payments.
4. Business vs. Personal Use – Only the business-use percentage of vehicle expenses is deductible.

Different Types of Vehicle Tax Deductions and Credits

1. Section 179 Deduction (Immediate Write-Off)

• Allows businesses to deduct the full purchase price of qualifying vehicles in the year they are placed in service.
• Applies to both new and used vehicles used at least 50% for business purposes.
• 2025 Limit: Up to $1,250,000 in total equipment purchases, with a phase-out at $3,130,000.

Example: If a business buys an SUV for $60,000 and uses it 100% for business, they may deduct the full $60,000 in the first year under Section 179.

2. Bonus Depreciation

• Allows businesses to immediately write off 40% of the cost of qualified new or used vehicles in 2025 (previously 60% in 2024).
• Applies to vehicles used more than 50% for business.

3. Mileage Deduction (Standard vs. Actual Expenses)

Depending on ownership, businesses may choose between:

• Standard Mileage Rate: 70 cents per mile (2025) for business use.
• Actual Expenses: Deducting fuel, maintenance, insurance, and depreciation based on business-use percentage.

Example: If a vehicle is driven 15,000 miles per year, with 10,000 miles for business, the standard deduction would be:
10,000 miles × $0.67 = $6,700 tax deduction.

4. EV Tax Credits (Electric Vehicle Incentives)

• Businesses purchasing qualified electric vehicles (EVs) may receive a tax credit of up to $7,500 for new EVs and up to $4,000 for used EVs.
• To qualify, vehicles must meet battery size and final assembly requirements.

5. Heavy Vehicle Tax Deduction (Over 6,000 lbs GVWR)

• SUVs, trucks, and vans with a gross vehicle weight rating (GVWR) over 6,000 lbs qualify for accelerated deductions under Section 179 and bonus depreciation.
• Businesses can fully deduct the cost of these vehicles in the first year.

Example: A business buys a Ford F-250 (GVWR 7,850 lbs) for $75,000 and can fully deduct the cost using Section 179 and bonus depreciation.

Business vs. Personal Use of Vehicles

The IRS requires businesses to only deduct the business-use percentage of a vehicle.

Important: If a company-owned vehicle is used personally, the personal-use percentage must be reported as taxable income to the employee through payroll (subject to income tax, but not FUTA/Medicare/FICA).

Leasing vs. Purchasing: What’s the Best Option?

Choosing between leasing or buying depends on business goals, tax implications, and cash flow.

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When to Lease: Businesses that replace vehicles frequently and want lower upfront costs.
When to Buy: Businesses that plan to use the vehicle long-term and want to maximize deductions through depreciation.

How to Maximize Tax Savings on Vehicle Purchases

To get the most tax benefits from a business vehicle, follow these best practices:

1. Consult a Tax Expert (Like Us!)

• A tax professional can help you determine whether Section 179, bonus depreciation, or mileage deductions provide the best tax savings.
• We ensure compliance with IRS regulations.

2. Make Purchases Before Year-End

• To qualify for current-year deductions, the vehicle must be placed in service before December 31.

3. Standard vs Accelerated Depreciation

• Accelerated depreciation is a broad term that includes Section 179, bonus depreciation, and other rapid write-off methods. So normal depreciation would be if you buy a vehicle and need to depreciate it over five years. Anytime that you're using a 179 or a bonus to depreciate the vehicle quicker, that's accelerated depreciation. 
• If the company doesn't own the vehicle, that means you can’t depreciate it. Leasing would also involve a mileage tracking.

4. Track Business vs. Personal Use

• Keep detailed mileage logs to justify deductions.
• If a vehicle is partially used for personal purposes, only the business-use percentage can be deducted.

5. Understand Where Vehicle Expenses Appear on Financial Statements

• Depreciation appears on the income statement as a non-cash expense.
• Lease payments appear on the income statement as an operating expense.
• Owned vehicles are listed as assets on the balance sheet.

Choosing the Right Vehicle Tax Strategy

Vehicle purchases offer multiple tax benefits, but choosing the right deduction method, depreciation structure, and vehicle type is crucial for maximizing savings.

Key Takeaways:

✅ Section 179 & bonus depreciation allow immediate write-offs for business-use vehicles.
✅ Heavy vehicles (over 6,000 lbs GVWR) qualify for accelerated deductions.
✅ Electric vehicle tax credits provide up to $7,500 in tax credits.
✅ Leasing vs. purchasing depends on cash flow, tax strategy, and business needs.
✅ Consulting a tax professional ensures compliance and maximized tax benefits.

Need expert guidance on vehicle deductions and tax incentives? Contact LedgerFi today to optimize your tax strategy and maximize savings!