Navigating Tax Terrain: Shifting Gears on Business Vehicle Deductions.

Maximizing Tax Benefits for Business Vehicles: Key Considerations for 2025

For business owners and self-employed professionals, choosing the right method to deduct vehicle expenses can lead to significant tax savings. The IRS provides two primary methods: the standard mileage rate and the actual expense method. Understanding the nuances of each can help businesses optimize their tax deductions.

Understanding the IRS Standard Mileage Rate

The IRS recently announced that the standard mileage rate for 2025 will be 70 cents per mile—an increase of three cents from 2024. This rate provides a simplified way for business owners to deduct vehicle expenses without tracking every individual cost. However, while easy to use, it may not always yield the highest deduction.

The Actual Expense Method: A More Lucrative Option?

Comparing the standard mileage rate to the actual expense method is critical. The actual expense method requires meticulous recordkeeping but often results in a significantly larger deduction, particularly for those who switch methods early in the year. This method accounts for:

• Fuel costs

• Repairs and maintenance

• Insurance premiums

• Depreciation allowances (a major factor in increasing deductions)

The Tax Cuts and Jobs Act (TCJA) made the actual expense method even more appealing by increasing depreciation limits for luxury vehicles. In 2024, businesses can deduct up to $12,400 in first-year depreciation, plus a bonus depreciation of $8,000.

Switching Methods: What You Need to Know

If you’ve been using the standard mileage rate, you might consider switching to the actual expense method—but only if it’s financially beneficial. However, once you lease a vehicle using the standard mileage rate, you’re locked into that method for the duration of the lease.

For example, a business owner driving 12,000 miles annually could see the following deductions:

• Standard mileage rate: $8,900 deduction

• Actual expense method: $19,200 deduction (including depreciation and business-related expenses)

That’s a $10,300 difference in potential tax savings!

Key Takeaways for Business Owners

• Evaluate both deduction methods before filing to maximize tax benefits.

• Depreciation rules under the TCJA favor the actual expense method, particularly for newer and luxury business vehicles.

• Meticulous recordkeeping is necessary for the actual expense method, but it can lead to higher deductions.

Reference: Small Business: Tax Strategies- Vol. 20, No. 2, Pg. 5.