Vehicle Depreciation for Individuals and Sole Proprietors: Basis, Limits, and Recapture Risks

Vehicle depreciation is one of the most technical areas affecting individual taxpayers with business use of a car, truck, or van. The taxpayer generally cannot deduct the full cost of a vehicle in the year of purchase unless a specific expensing rule applies. Instead, the cost is recovered through depreciation, subject to annual limitations and business-use requirements.

For 2025, the depreciation limitations for passenger automobiles placed in service during the year are:

• $20,200 in the first year if the section 168(k) additional first-year depreciation deduction applies,
• otherwise $12,200 in the first year, with later-year caps of $19,600, $11,800, and $7,060, depending on the year in the recovery period.

The taxpayer’s basis generally starts with cost, including sales tax and certain acquisition charges, and is then reduced by any section 179 deduction, special depreciation allowance, and prior depreciation.

Several key rules govern depreciation:

• The vehicle must be used in business or for income production.
• If business use is more than 50%, MACRS and section 179 may be available, subject to limits.
• If business use is 50% or less, the taxpayer generally must use straight-line depreciation and cannot claim section 179 or bonus depreciation.
• If business use later drops to 50% or less after accelerated depreciation or section 179 was claimed, excess depreciation may have to be recaptured into income.

For 2025, section 179 expensing generally allows up to $2.5 million of qualifying property, reduced when total qualifying property exceeds $4 million, but passenger vehicles remain subject to separate annual caps and special SUV limitations.

The most common errors are failing to track business-use percentage, claiming depreciation on personal-use mileage, ignoring annual luxury auto caps, and overlooking recapture when business use declines. Vehicle depreciation can be highly beneficial, but only if the taxpayer maintains mileage logs and basis records that support the deduction.

Schedule C Vehicle Deductions: Standard Mileage vs. Actual Expenses

For Schedule C filers, vehicle deductions are often significant, but the taxpayer must choose the correct method and apply it consistently. The two principal methods are:

• the standard mileage rate, and
• actual expenses.

For 2025, the standard mileage rate for business use is 70 cents per mile. For 2026, it is 72.5 cents per mile. If the taxpayer uses the standard mileage rate, actual operating costs such as gas, repairs, insurance, and depreciation are not separately deducted, although business-related parking fees and tolls may still be deductible.

The standard mileage method is not always available. It generally cannot be used if the taxpayer:

• operates five or more vehicles at the same time,
• claimed depreciation using a method other than straight line,
• claimed section 179 on the vehicle,
• claimed special depreciation allowance, or
• previously used actual expenses on a leased vehicle.

Under the actual-expense method, deductible costs may include gas, oil, repairs, insurance, registration, lease payments, depreciation, parking fees, and tolls, but only to the extent allocable to business use. Commuting remains nondeductible personal expense.

Taxpayers using a vehicle for both business and personal purposes must allocate expenses based on mileage or another supportable method. For example, if 60% of total miles are business miles, only 60% of actual expenses are deductible.

The Schedule C instructions also note that if the taxpayer uses the vehicle for both business and personal purposes and claims a personal-use vehicle loan interest deduction on Schedule 1-A, the same interest cannot also be deducted on Schedule C.

The best method depends on facts. Standard mileage is simpler and often preferable where operating costs are modest and recordkeeping is limited. Actual expenses may be better where the vehicle is expensive, heavily used in business, or eligible for depreciation benefits. Either way, mileage substantiation is essential.