Auto expenses: What’s deductible and what’s not | Taxing Matters

We get a lot of questions from our clients about auto expenses. The rules are complicated and there’s confusion around what is and is not tax deductible, so let’s clarify the guidance for three categories of taxpayers: employees, self-employed individuals and business owners.

Employees
When you use your personal car for work, your employer will usually reimburse you for your vehicle expenses, so you can’t deduct those costs on your taxes. You’re likely required to submit proof of the number of miles you drove and are reimbursed based on the current standard mileage rate, which is 65.5 cents per mile. So if you drove 35 miles, your employer will reimburse you $22.93.

If you don’t get reimbursed, there’s not much you can do about it—for now. Unreimbursed auto expenses were deductible as a miscellaneous itemized deduction prior to 2018. That’s been suspended through 2025, but beginning in 2026, you’ll be able to deduct unreimbursed work-related auto expenses once again. That said, if you itemize your deductions, some taxing jurisdictions allow you to deduct state and local personal property taxes paid on your car even if you don’t use it for work. You would do this on Schedule A.

Note: You can’t deduct or ask to be reimbursed for your normal drive to and from your workplace.

Sole proprietors, gig workers, self-employed and individual contractors
If you work for yourself, you can deduct vehicle expenses related to the following types of travel. Just be sure you can substantiate the business use with clear documentation, especially if you also use the vehicle for personal travel. You may deduct expenses related to driving:

• From one job site to another
• To visit customers or clients
• To a work-related meeting taking place somewhere other than your primary work location
• To perform a business function like making a delivery or picking up supplies
• From one work location to another if you regularly work in more than one place
• From your home to a temporary work or training location outside of your area, such as to and from a hotel near an out-of-town customer or training facility

Depending on where you live, you may be able to deduct the state and local property taxes on the car as well. You’d deduct the business portion on Schedule C and the personal portion on Schedule A. The same goes for interest payments on a car loan. You can deduct the part of the interest expense equal to your business use of the car. For example, if 25% of your driving was for business, you can deduct 25% of the interest on Schedule C. Just don’t try to deduct the rest from your personal taxes, because that’s not allowed.

Note: Your routine commuting expenses to your regular work location are not deductible.

Ride sharing
With so many Uber and Lyft drivers in the area, it’s worth clarifying what counts as a deductible “ride sharing” expense. If driving people around is your business, your expenses are deductible. If you’re employed, carpooling to your regular workplace is not tax deductible. But carpooling to a client’s location or offsite work or meeting destination is reimbursable, and if unreimbursed, will be deductible starting in 2026.

How to calculate your deductible expenses

As a self-employed taxpayer, you can tally up your deductible expenses using either the standard mileage rate or actual car expenses, whichever is more favorable. Business owners must deduct actual car expenses.

• Standard mileage rate. This is the easiest way of totaling your vehicle expenses. You simply multiply the number of miles you drove for business by the standard milage rate for the tax year. For 2023, it’s 65.5 cents per mile. The rate is typically adjusted annually for inflation, but you may remember seeing two reimbursement rates in 2022. That’s because gas prices spiked last year and the government made a mid-year increase.
• Actual car expenses. To calculate your deduction using your actual car expenses, you would:

1. Add up all fixed and variable operating costs necessary to maintain the car, including depreciation, lease payments, licenses, registration fees, maintenance and repairs, tires, insurance, gas and gas taxes, and oil.
2. Determine how much you drove the car for business vs. personal use, usually by a mileage ratio, to come up with the percentage used for business.
3. Multiply your total auto expenses by the percentage used for business to come up with your preliminary deductible amount and add business tolls and parking fees to determine your final deductible amount.

Note: Computing actual expenses involves deducting depreciation and there are complicated rules around depreciation limits, allowances and maximums. If you plan to take a deduction for depreciation, it’s best to consult with a tax expert.

Standard mileage rate vs. actual car expenses: Which method should you use?
If you drive a lot or rack up a lot of miles, you’re probably better off using the standard mileage deduction; even more so if you drive an electric or high-fuel-efficiency vehicle. That’s because the standard mileage rate credits gas as the largest expense, so you’ll make out better financially than using the actual-expenses method, which emphasizes operating costs. On the other hand, if you don’t drive a lot of miles, it might be advantageous to use actual costs.

Besides, from a practical perspective, it’s easier to use the standard mileage rate. All you need to do is track the miles you drive for work instead of having to be fastidious about saving all your receipts and records of every car expense, in addition to your mileage. Chances are, you’re busy enough running your business. And perhaps most important: the more points of data required to calculate and prove your expenses, the more that can be challenged if you’re audited, and the more difficult it is to verify your costs.

Business owners
Business owners are the exception for mileage rate vs. actual expenses: If you own a business, you need to use the actual vehicle costs to calculate your deductible expenses because the standard mileage rate isn’t an option for business-owned vehicles. And because company cars are considered capital expenses, you’ll capitalize, rather than deduct, the costs of the vehicles the business owns.

That means instead of taking a deduction for the costs of buying and operating your vehicles, you’ll recover the money by deducting the cars’ depreciation up to certain dollar limits.

On the other hand, you can deduct the cost of repairs made to company cars. But—and this gets confusing—if you make improvements to the cars, those costs are considered capital expenses and you’ll only be able to recover them through your annual deduction for depreciation. As you can see, depreciation is pretty complicated, which is why I suggest consulting with a tax professional.

Your business can also deduct the amount you reimburse employees for using their personal car for work purposes. And if you use your personal car for work, you can deduct the portion of expenses used for business travel when filing your personal taxes.

Substantiate, substantiate, substantiate
However you calculate your expenses, I can’t overstate the importance of keeping good records. For mileage, jot down your starting and ending locations, odometer readings and business purpose every time you use a car for work. You can use pen and paper or an app or even a screenshot from Google Maps or a similar program showing the route and mileage.

For expenses, be kind to your future self and save all digital and paper receipts and records in online and physical folders, and keep a written, chronological log listing every expense. You might find it helpful to have a separate credit or debit card just for business expenses. Because the better your records, the easier your work at tax time. And the easier time you’ll have with the “tax man.”

Anthony R. Scinto, CPA, is a Tax Partner and Chair of the Tax Department at MMB+CO