1. Depreciation Basics
When you use a vehicle for business, you recover its cost through depreciation over several years. Vehicles are 5-year property under MACRS (Modified Accelerated Cost Recovery System). This applies whether you own or lease the vehicle.
2. Section 179 Expensing
Section 179 allows you to deduct the full cost of qualifying property in the year placed in service. For 2025, the Section 179 limit is $2.5 million, with the benefit phasing out dollar-for-dollar once qualifying purchases exceed $4 million (the limit is indexed in later years). However, passenger vehicles have special limits: the maximum Section 179 deduction for SUVs with gross vehicle weight rating over 6,000 pounds is $31,300 for 2025 (indexed annually).
3. Passenger Automobile Limits
For passenger automobiles (not SUVs over 6,000 lbs), depreciation is capped. For 2025, the first-year depreciation limit is $12,600 ($21,000 with bonus depreciation). Second and later year caps are inflation-adjusted annually — check the current IRS revenue procedure for the exact amounts before depreciating a vehicle.
4. Bonus Depreciation
Bonus depreciation is back to 100% for property acquired after January 19, 2025, under the 2025 federal tax law, and it is permanent (no scheduled phase-down). For eligible property, 100% of the cost can be deducted in the first year, after applying Section 179 but before regular MACRS depreciation. Passenger-vehicle first-year caps (above) still apply to cars.
5. Lease vs. Buy
Leased vehicles do not use depreciation. Instead, a portion of each lease payment is deductible based on business use percentage. However, lessors include an inclusion amount in income for luxury vehicles, which reduces the deductible lease amount.
6. Documentation Requirements
Track business vs. personal use through mileage logs. Business use percentage determines the deductible portion of depreciation, interest, and other expenses. Mixed-use vehicles require allocation between business and personal portions.