Understanding the Mileage Deduction and Depreciation Recapture When Selling a Business Vehicle

The mileage deduction is a great way for self-employed individuals and small business owners to lower their tax bill when they use a personal vehicle for business. However, how you choose to deduct vehicle expenses can have a big impact when/if you eventually sell the vehicle.

If you choose actual expenses instead of the standard mileage rate, you’ll need to understand something called depreciation recapture, which can result in unexpected taxable income when you sell the car.

This article will break down:

1. The two methods for claiming vehicle expenses.

2. What happens when you sell a vehicle that was used for business.

3. How depreciation recapture works and what it means for your taxes.

Two Ways to Deduct Business Vehicle Expenses

When you use your personal vehicle for business purposes, the IRS allows you to deduct some of the costs. You have two methods to choose from:

1. The Standard Mileage Rate Method

This is the simpler option. You track the number of business miles you drive and multiply that by the IRS mileage rate (e.g., $0.67 per mile for 2024).

✅ Covers all vehicle costs, including depreciation, gas, maintenance, insurance, and repairs.

✅ Easy to track—just record your business mileage.

✅ You don’t have to deal with depreciation recapture when you sell the car.

🚫 You cannot deduct actual expenses like gas or repairs.

🚫 If you want to switch to actual expenses later, you must use straight-line depreciation.

2. The Actual Expenses Method

With this method, you total up your actual vehicle expenses, such as gas, maintenance, insurance, registration fees, and depreciation. You can only deduct the business-use percentage of those costs.

✅ Allows you to deduct all eligible expenses related to business use.

✅ Might result in a larger deduction if you have high vehicle costs.

🚫 Requires more record-keeping since you must track each expense.

🚫 You must claim depreciation, which affects taxes when you sell the vehicle.

⚠️ Important: If you choose actual expenses, you are required to track and deduct depreciation—even if you don’t actively claim it.

What Happens When You Sell a Business Vehicle?

If you used the standard mileage rate, you can sell your vehicle without worrying about any extra tax complications.

However, if you used actual expenses, the IRS assumes you deducted depreciation over time, even if you weren’t aware of it. This means you may owe taxes when you sell the vehicle.

This is due to depreciation recapture, which requires you to pay back some of the tax benefit you received when writing off your vehicle’s value.

Understanding Depreciation Recapture

What Is Depreciation?

Depreciation is a way to account for how a vehicle loses value over time. If you deduct actual expenses, part of your deduction each year is depreciation, reducing the car’s “book value” on paper.

• Example: If you buy a car for $30,000 and use it 50% for business, you can only depreciate 50% of its value over time.

• Let’s say after five years, you’ve deducted $10,000 in depreciation.

What Happens When You Sell?

When you sell the vehicle, the IRS calculates your gain or loss based on the adjusted basis (purchase price minus depreciation). If you sell the vehicle for more than the adjusted basis, you must recapture the depreciation as ordinary taxable income.

Example of Depreciation Recapture in Action

• You buy a car for $30,000.

• You use actual expenses, claiming $10,000 in depreciation over time.

• Your adjusted basis is now $20,000 ($30,000 – $10,000).

• You sell the vehicle for $25,000.

✅ Your profit is $5,000 ($25,000 sale price – $20,000 adjusted basis).

✅ This $5,000 is taxable as ordinary income because it is recaptured depreciation.

If you sold the car for $18,000, you would have a $2,000 loss, but since the car was partially used for personal use, you cannot deduct the loss.

Key Takeaways

1. If you use the standard mileage rate, you don’t have to worry about depreciation recapture.

2. If you use actual expenses, the IRS assumes you took depreciation—even if you didn’t claim it.

3. When you sell a business vehicle, you may owe tax on the recaptured depreciation, in other words , on the deduction you got for the annual depreciation.

4. Always keep records of your vehicle’s business use, purchase price, and depreciation to avoid surprises.

Do You Need to Report the Sale If the Sales Price Is Less Than the Basis?

If you sell a vehicle used for business and the sales price is less than the adjusted basis, then whether you need to report it depends on how the vehicle was used and whether there is a deductible loss.

1. If the Vehicle Was Used for Business (With Actual Expenses)

• If you used actual expenses and claimed depreciation, you must report the sale on Form 4797 (Sales of Business Property) even if you sold it for less than the adjusted basis.

• However, if the sale results in a loss, it can only be deducted if the vehicle was 100% business use.

• If the vehicle was partly personal use, the loss is not deductible—but you still need to report it.

Example (Loss That Cannot Be Deducted)

• Purchase Price: $30,000

• Business Use: 50%

• Depreciation Claimed: $10,000

• Adjusted Basis: $20,000 ($30,000 – $10,000)

• Sale Price: $18,000

• Loss: $2,000 ($18,000 – $20,000)

✅ The IRS requires reporting because depreciation was claimed.

❌ The $2,000 loss is NOT deductible because the car was part personal use.

2. If the Vehicle Was Used for Business (Standard Mileage Rate)

• If you only used the standard mileage rate, you don’t need to report the sale unless it was a business-owned vehicle (title in the business name).

• Since depreciation is built into the mileage rate, there is no depreciation recapture to worry about.

3. If the Vehicle Was 100% Personal Use

• If you never deducted any expenses for business use, you do not need to report the sale on your tax return.

• Personal-use vehicle sales are not taxable unless you sell the car for more than you paid for it (which is rare).

Final Answer: Do You Report It?

✅ Yes, if you claimed actual expenses and depreciation, even if you sold at a loss.

❌ No, if you only used the standard mileage rate and never depreciated the vehicle.

❌ No, if it was 100% personal use and sold at a loss.

Choosing between mileage or actual expenses can have a big impact on your tax bill when selling a vehicle. If you’re not sure which method is best, it’s a good idea to consult a tax professional before making a decision.