Business Tax Preparation · Business expenses, deductions and credits

Vehicle use and expenses

A vehicle used in a business raises three questions in sequence: how much of its use is business use, which method the taxpayer uses to measure the cost, and what happens when the business proportion falls. The third is where the money is, because the statute recaptures depreciation already taken.

The rule

The deduction. Vehicle running costs are ordinary and necessary expenses of carrying on a trade or business (IRC § 162(a)), deductible in the business proportion of their actual amount — unless the taxpayer uses the optional method instead.

The optional method. the Commissioner may establish a method under which a taxpayer uses mileage rates to determine the ordinary and necessary expenses of using a vehicle, in lieu of substantiating actual costs — but the taxpayer is not relieved of substantiating the business mileage of each use and the time and business purpose of it^TY2026 (Reg. § 1.274-5(j)(2)). Note both halves: the rate replaces the substantiation of cost, and replaces nothing else.

Records. no deduction or credit is allowed for any traveling expense, any gift expense, or any listed property unless the taxpayer substantiates by adequate records or sufficient corroborating evidence the amount, the time and place of the travel or date and description of the gift, the business purpose, and the business relationship of the person receiving the benefit^TY2026 (IRC § 274(d)), a vehicle being listed property within IRC § 280F(d)(4). The one relief is the IRC § 274(d) substantiation requirements do not apply to a qualified nonpersonal use vehicle^TY2026 (Reg. § 1.274-5(k)(1)).

Depreciation caps. {fig:vehicle.280F_caps} (IRC § 280F(a)(1)(A)), and {fig:vehicle.280F_unrecovered} (IRC § 280F(a)(1)(B)). Those statutory figures are indexed under IRC § 280F(d)(7) and republished each year. For a passenger automobile placed in service in 2026 the limitations are {fig:vehicle.280F_bonus_2026} (Rev. Proc. 2026-15 Table 1), and where no IRC § 168(k) deduction applies, {fig:vehicle.280F_nobonus_2026} (Rev. Proc. 2026-15 Table 2). The gap between the two tables is exactly {fig:vehicle.280F_bonus_uplift}, and {fig:vehicle.280F_no_bonus_when} (Rev. Proc. 2026-15 § 2.03).

The current mileage rate. 72.5 cents per mile for all miles of business use in 2026 — though the rate cannot be used for an itemized deduction for unreimbursed employee travel, that deduction being permanently disallowed by Pub. L. 119-21 § 70110^TY2026 (Notice 2026-10 § 3). Two other rates travel with it — 14 cents per mile for use of an automobile in rendering gratuitous services to a charitable organization — a figure fixed by IRC § 170(i) and not indexed^TY2026 and 20.5 cents per mile in 2026 for medical care within IRC § 213 or for a move deductible under IRC § 217(g) as supplemented by § 217(k)(2)^TY2026. And the rate is not free of basis consequences: 35 cents of each business mile in 2026 is treated as depreciation and reduces basis — 33 cents for 2025, 30 cents for 2024, 28 cents for 2023 and 26 cents for 2022^TY2026 (Notice 2026-10 § 4).

Leases and allowances. a lessee of a passenger automobile with a lease term beginning in 2026 includes an amount in gross income determined under Reg. § 1.280F-7(a); the table runs from a fair market value over $62,000 upward, so a lease below that figure produces no inclusion^TY2026 (Rev. Proc. 2026-15 Table 3), and $61,700 — the maximum standard automobile cost for computing an allowance under a fixed and variable rate plan, and also the maximum fair market value for the fleet-average and vehicle cents-per-mile valuation rules for automobiles first made available to employees in 2026^TY2026 (Notice 2026-10 §§ 5 and 6).

When business use falls. {fig:vehicle.280F_fifty_percent} (IRC § 280F(b)(1)), and {fig:vehicle.280F_recapture} (IRC § 280F(b)(2)(A)).

Current figures

How it works in practice

The mileage rate replaces costs, not records. the Commissioner may establish a method under which a taxpayer uses mileage rates to determine the ordinary and necessary expenses of using a vehicle, in lieu of substantiating actual costs — but the taxpayer is not relieved of substantiating the business mileage of each use and the time and business purpose of it^TY2026 (Reg. § 1.274-5(j)(2)). A taxpayer using it still has to record the business mileage of each use and the time and business purpose of it. What the rate does is relieve them of proving what the fuel, oil, tyres, repairs, insurance, registration and depreciation actually cost. That is why the answer to “may I also deduct my vehicle insurance?” is no — the rate already includes it, and deducting it separately would count it twice.

What is not in the rate. Parking and tolls incurred for business are deductible on top, because they are not costs of operating the vehicle over a mile. So is the business portion of interest on a loan to buy the vehicle, for a taxpayer other than an employee, and so are personal property taxes on it. Those three are the standard additions.

Choosing the method is a decision with consequences for the whole life of the vehicle. A taxpayer who uses the mileage rate in the first year the vehicle is placed in service is treated as having elected out of the depreciation regimes for it, and the rate is deemed to include a depreciation component that reduces basis year by year. A taxpayer who claims actual expenses and depreciation in the first year, particularly by expensing under IRC § 179 or claiming bonus depreciation, cannot switch to the mileage rate later for that vehicle. The first-year choice is the one that matters.

Depreciation on a passenger automobile is capped four ways over. {fig:vehicle.280F_caps} (IRC § 280F(a)(1)(A)). The figures in the statute are adjusted for inflation and republished annually — for 2026, {fig:vehicle.280F_bonus_2026}. The practical effect is that a car costing more than a modest amount is recovered over far longer than its recovery period, and {fig:vehicle.280F_unrecovered} (IRC § 280F(a)(1)(B)) picks up what is left. Note that the first-year figure is the only one of the four that the IRC § 168(k) deduction moves, and it moves by a fixed statutory amount rather than proportionally.

The IRC § 179 election does not escape the caps. Expensing a car under IRC § 179 is still subject to the IRC § 280F(a) limitation for that year, and a sport utility vehicle above the weight threshold has its own separate ceiling: $32,000 — the cost of any sport utility vehicle that may be taken into account under IRC § 179 for a taxable year beginning in 2026^TY2026 (IRC § 179(b)(5)(A)).

The recapture rule is the trap. {fig:vehicle.280F_fifty_percent} (IRC § 280F(b)(1)) and {fig:vehicle.280F_recapture} (IRC § 280F(b)(2)(A)). Two separate things happen when qualified business use falls to half or less in a year after the vehicle was placed in service: the excess of the depreciation actually taken over what the alternative depreciation system would have given is included in gross income that year, and depreciation for that year and all later years is computed under IRC § 168(g). The recapture is ordinary income and it is not deferred.

“Qualified business use” is narrower than “business use.” Use in a trade or business counts; use in an income-producing activity that is not a trade or business does not, for the predominant use test, though it can still support a deduction. The distinction matters only at the margin, but that is exactly where the fifty per cent line is drawn.

How this has changed

The 2026 figures on this page come from annual guidance, not from statute, and they move every year. The mileage rate is set under the authority in Reg. § 1.274-5(j)(2) and published in Notice 2026-10; the IRC § 280F(a) caps are indexed under IRC § 280F(d)(7) and published in Rev. Proc. 2026-15. Always check the year on the face of the document before relying on a figure from either source.

The two 2026 depreciation tables now differ only in the first year, and by a fixed amount. That is the visible consequence of Pub. L. 119-21 § 70301 making the IRC § 168(k) deduction permanent at the full rate: Rev. Proc. 2026-15 states that its Table 1 applies whether the deduction is allowed under the amended § 168(k) or under former § 168(k), whose applicable percentage for property acquired before 20 January 2025 and placed in service in 2026 has phased down to a fifth. Two different statutory routes, one table.

The statutory caps in IRC § 280F(a)(1)(A) were raised sharply in 2017 and are the base for indexation. Pub. L. 115-97 § 13202(a) replaced figures that had stood at a fraction of their present level. Material that quotes the caps without saying which year it means is describing a figure that has moved every year since.

The employee’s side of this topic has been closed since 2018. An employee who uses their own car for work has no deduction, because unreimbursed employee business expenses are miscellaneous itemized deductions and no miscellaneous itemized deduction is allowed for any taxable year beginning after 31 December 2017 — permanent since the 2026 end date was struck, and now at IRC § 67(h) rather than § 67(g)^TY2026. Pub. L. 119-21 § 70110(a) made that permanent and § 70110(b)(2) moved the suspension from IRC § 67(g) to IRC § 67(h). So a vehicle question about an employee is answered by the absence of a deduction, and only an accountable plan reimbursement from the employer produces a result. A statutory employee within IRC § 3121(d)(3) is on Schedule C and is unaffected.

Nothing in Pub. L. 119-21 amended IRC § 280F, so the mechanics on this page are unchanged for 2026.

Exam focus

Expect a method comparison. Know precisely what the mileage rate subsumes — insurance, repairs, fuel, registration and depreciation — and what sits outside it: parking, tolls, interest and personal property taxes.

Expect the recapture rule. When business use falls to half or less after a year of predominant use, two things happen, and a question that offers only the prospective change is offering half the answer.

Know that substantiation under IRC § 274(d) applies to a vehicle as listed property, that the mileage method does not relieve it, and that failure is fatal to the deduction rather than merely unhelpful.

Finally, for an employee, start from the suspension of miscellaneous itemized deductions. The deduction the question invites usually does not exist.

Check yourself

1. A business uses the standard mileage rate for its cars. May it also deduct their insurance premiums?

Answer: No. The rate is set under the Commissioner may establish a method under which a taxpayer uses mileage rates to determine the ordinary and necessary expenses of using a vehicle, in lieu of substantiating actual costs — but the taxpayer is not relieved of substantiating the business mileage of each use and the time and business purpose of it^TY2026 (Reg. § 1.274-5(j)(2)) in lieu of substantiating the actual costs of using the vehicle, and insurance is one of those costs. Deducting it separately would count it twice. Parking, tolls, loan interest and personal property taxes are outside the rate and remain deductible.

2. A car placed in service with 70 percent business use drops to 40 percent in its fourth year. What happens?

Answer: Two things. {fig:vehicle.280F_fifty_percent} (IRC § 280F(b)(1)) puts depreciation for that year and all later years onto the alternative depreciation system, and {fig:vehicle.280F_recapture} (IRC § 280F(b)(2)(A)) includes the excess of the depreciation already taken over what IRC § 168(g) would have allowed in gross income for that fourth year.

3. A vehicle has been used 30 percent for business since it was placed in service. Is there recapture when business use falls further?

Answer: No. IRC § 280F(b)(2)(A)(i) requires that the property was predominantly used in a qualified business use in the year it was placed in service. It was not, so the alternative depreciation system applied from the outset and there is no excess depreciation to recapture.

4. An employee drives 9,000 business miles in her own car and is not reimbursed. What may she deduct?

Answer: Nothing. Unreimbursed employee business expenses are miscellaneous itemized deductions, and no miscellaneous itemized deduction is allowed for any taxable year beginning after 31 December 2017 — permanent since the 2026 end date was struck, and now at IRC § 67(h) rather than § 67(g)^TY2026. Her remedy is an accountable plan reimbursement from her employer, which is excluded from her income and deducted by the employer.

5. A taxpayer keeps a diary of client appointments and receipts for fuel, but no record of the mileage of individual trips. May he use the mileage rate on an annual estimate?

Answer: No. the Commissioner may establish a method under which a taxpayer uses mileage rates to determine the ordinary and necessary expenses of using a vehicle, in lieu of substantiating actual costs — but the taxpayer is not relieved of substantiating the business mileage of each use and the time and business purpose of it^TY2026 (Reg. § 1.274-5(j)(2)) says in terms that the taxpayer is not relieved of substantiating the business mileage of each use, and no deduction or credit is allowed for any traveling expense, any gift expense, or any listed property unless the taxpayer substantiates by adequate records or sufficient corroborating evidence the amount, the time and place of the travel or date and description of the gift, the business purpose, and the business relationship of the person receiving the benefit^TY2026 (IRC § 274(d)) makes substantiation a condition of the deduction. An annual estimate is not a record of each business use.