How to Deduct Car Payments

The Internal Revenue Service allows you to deduct vehicle expenses as long as you use that vehicle to produce taxable income. Any personal use is nondeductible; if you share the vehicle between home and business use, you must keep track of the percentage of miles used for both. Two basic methods are used to take this deduction: a standard mileage rate or actual expenses. Car payments don't qualify, but interest and leasing expenses do, and businesses can write off the total purchase price with some limits and conditions.

A vehicle used in business will rack up deductible expenses. If you intend to take that deduction, you'll have to keep track of the cost of repairs, gas, license fees, maintenance, highway tolls and all other expenses that are vehicle related. The IRS allows the deduction of these "actual" expenses or the use of a standard mileage rate, which reached 56 cents per mile as of tax year 2014. With some excepted deductions, you can select one or the other method, but never both.

The cost of a vehicle is not a deductible expense, but the IRS does allow you to write off any interest payments made on a loan for the purchase. In addition, loan interest is one of the few expenses you can deduct in addition to the standard mileage deduction (the others are registration fees, tolls and parking charges). If you use actual expenses, you must pro-rate the total expense amount by the percentage of miles used for business. If 40 percent of the miles are driven for business and 60 for personal, you can only claim 40 percent of the actual expenses as a business expense.

If you lease rather than purchase your vehicle outright, you can deduct the lease payments -- again, pro-rating them according to the percentage of use for business. "Personal" use, in the view of the IRS, includes commuting to and from work. Any payments you make in advance on the lease must be spread over the entire period of the lease; you can't deduct them in the year you write that "due on signing" lump-sum check.

If your business buys a vehicle for commercial use, you can write off the total expense through the Section 179 deduction rules. This is true whether the vehicle is new or used; it simply has to be new as a part of your business. There is a limit on the total deduction of $11,060 for cars and $11,160 for trucks and vans, and you must take the deduction in the same year you place the vehicle in service. Section 179 does not apply to individual taxpayers, who claim their car expenses on Schedule A of Form 1040, along with other itemized expenses.