Many manufacturers purchase vehicles for business purposes.
These can range from service and delivery vehicles to heavy SUVs and pickup
trucks for transporting materials to "company cars" for salespeople and
executives. To maximize the tax benefits of such investments, it's important to
be aware of the applicable tax rules, which can be complicated.
Actual expenses vs. standard mileage rate
The year you place a vehicle in service, you can choose to
deduct the actual expenses attributable to your business vehicle use or — if
the vehicle is a car, SUV, van, pickup or panel truck — claim the standard
mileage rate deduction. If you go the actual expenses route, deductible
expenses include gas, oil, repairs, tires, insurance, registration fees,
licenses and depreciation (or lease payments) for the portion of total miles
driven for business purposes.
To calculate depreciation expenses, there's typically a separate
computation for each year until the vehicle has fully depreciated. Under the
general rule, depreciation is calculated over a six-year span for a percentage
of the purchase cost as follows:
- Year 1 — 20%
- Year 2 — 32%
- Year 3 — 19.2%
- Year 4 —
11.52%
- Year 5 —
11.52%
- Year 6 — 5.76%
If a vehicle is used 50% or less for business purposes, the
straight-line method (10% in Years 1 and 6 and 20% in Years 2 through
5) must be used to calculate depreciation deductions instead of the percentages
listed above.
Depending on the cost of a passenger auto, your deduction may be
less than the percentages of cost above because "luxury auto" annual
depreciation ceilings, which are proportionately reduced for any nonbusiness
use, apply. These are indexed for inflation and may change annually. For
passenger autos (including trucks and vans) placed in service in 2026, the
ceilings generally are as follows:
- Year 1 —
$20,300 ($12,300 if you don't claim first-year bonus depreciation,
discussed below)
- Year 2 —
$19,800
- Year 3 —
$11,900
- Each remaining
year until the vehicle is fully depreciated — $7,160
More favorable depreciation rules apply to heavier SUVs, pickups
and vans, so the first-year depreciation for a "luxury" car could be much less
than for a heavy vehicle.
For example, 100% bonus depreciation or Section 179
expensing (see below for more information on these tax breaks) generally is
available for new or used vehicles with a gross vehicle weight rating (GVWR) of
more than 14,000 pounds — vehicles like heavy delivery trucks or large
flatbeds. A reduced Sec. 179 limit of $32,000 applies to vehicles rated at
more than 6,000 pounds but no more than 14,000 pounds (assuming the vehicle is
used more than 50% for business).
Notably, the $32,000 limit doesn't apply to any vehicle:
- Designed to
have a seating capacity of more than nine persons behind the driver's
seat,
- Equipped with
a cargo area of at least six feet in interior length that's an open area
or designed for use as an open area but enclosed by a cap and not readily
accessible directly from the passenger compartment, or
- That has an
integral enclosure, fully enclosing the driver compartment and load
carrying device, doesn't have seating rearward of the driver's seat and
has no body section protruding more than 30 inches ahead of the
leading edge of the windshield.
If you don't want to track all your actual vehicle expenses or
worry about depreciation calculations, you might prefer to apply the standard
mileage rate. However, actual expenses generally pack more of a tax-reduction
punch for heavier vehicles.
The 2026 rate for cars, SUVs, vans, and pickup or panel trucks
driven for business use is 72.5 cents per mile. This rate applies to
gasoline- and diesel-powered vehicles as well as electric and hybrid-electric
vehicles. A depreciation allowance is built into the rate, meaning you can't
claim both the depreciation deductions discussed above and the standard mileage
rate for the same vehicle.
Note: The
IRS annually adjusts the standard mileage rate. However, it occasionally
adjusts the rate mid-year if the average fuel price changes substantially, so a
mid-year increase could occur this year.
Bonus depreciation and Sec. 179
Sec. 168(k), also known as 100% first-year bonus depreciation,
is now permanent for eligible assets, including certain passenger vehicles.
That's a huge boon for capital-intensive industries like manufacturing.
Bonus depreciation is automatically applied to eligible assets
unless you elect out of it. You can elect out of it only on an asset-class
basis though, not for individual assets. For example, you can elect out of
bonus depreciation for all
so-called five-year property (which includes automobiles and light
general-purpose trucks), but you can't elect out of it for just one specific
automobile.
The Sec. 179 expense deduction allows small businesses to write
off the full cost of eligible assets, including certain passenger vehicles. For
tax years beginning in 2026, the maximum Sec. 179 deduction is
$2.56 million. But the deduction begins phasing out on a dollar-for-dollar
basis when qualifying purchases exceed $4.09 million. In contrast to bonus
depreciation, though, Sec. 179 deductions can't create an overall business
tax loss.
That said, claiming the Sec. 179 expense deduction can be
beneficial for assets not eligible for 100% bonus depreciation. And, because
you can apply it on an asset-by-asset basis, it may be preferable to bonus
depreciation if you want to immediately deduct the cost (up to applicable
limits) of some, but not all, vehicles in a particular asset class.
A complex web
Determining how to make strategic, tax-favorable vehicle
investments can be far from straightforward — especially when you consider that
state tax law won't necessarily conform with federal tax law. If you have
questions, contact us. We can help your manufacturing business navigate the
rules to ensure you're taking full advantage of all available tax breaks when
purchasing business vehicles.
