To reduce the costs of purchasing one or more vehicles for your business significantly, you may be able to take advantage of enhanced tax breaks. The Tax Cuts and Jobs Act (TCJA) more than tripled depreciation allowances for “luxury autos.” It also temporarily enhanced “bonus” depreciation for some business assets, boosting first-year depreciation deductions for passenger autos and allowing businesses to immediately deduct the full cost of heavier vehicles.
Typically, you’re permitted to deduct 20% of a vehicle’s depreciable basis in Year 1, 32% in Year 2, 19.2% in Year 3, 11.76% in Years 4 and 5, and 5.76% in Year 6. Before the TCJA, “luxury auto” limits capped depreciation deductions for passenger autos at $3,160 in Year 1, $5,100 in Year 2, $3,050 in Year 3 and $1,875 in Year 4 and beyond. Passenger autos have a gross vehicle weight rating (GVWR) of 6,000 pounds or less, with certain exceptions.
Under the old rules, a vehicle that cost more than $15,800 would have been considered a luxury auto and its depreciation deductions would have been reduced due to the cap. For example, if you bought a $50,000 car, which otherwise would have qualified for a $10,000 depreciation in Year 1, you’d only have been able to deduct $3,160 (plus bonus depreciation, if available; see below) in the first year.
The TCJA raised the yearly luxury auto limits to $10,000, $16,000, $9,600 and $5,760, respectively, for vehicles placed in service after 2017, effectively increasing the luxury auto threshold to $50,000. It’s important to note that, if a vehicle is used less than 100% for business, the depreciable basis and maximum depreciation allowances are reduced proportionately.
Before the TCJA, businesses could claim an additional, first-year depreciation bonus equal to 50% of the depreciable basis of certain new assets used more than 50% for business. The TCJA increased bonus depreciation to 100% for qualifying assets placed in service after September 27, 2017, and before January 1, 2023. It also extended bonus depreciation to used assets that are new to the taxpayer. After 2022, the percentage will gradually be reduced. Bonus depreciation phases out completely by the end of 2026.
For passenger autos with a GVWR of 6,000 pounds or less, bonus depreciation is limited to $8,000. Adding that amount to the increased depreciation allowance of $10,000, a business can deduct up to $18,000 in Year 1. But the $8,000 limit doesn’t apply to heavier vehicles, allowing you to deduct 100% of their depreciable basis in Year 1.
Sec. 179 Expensing
Effective for 2018, the TCJA permanently increased the Section 179 expensing limit, which allows you to immediately deduct, rather than depreciate, up to $1 million (previously, $500,000) in new and used assets that are used more than 50% for business and meet certain other requirements. Sec. 179 expensing gradually phases out once total annual investment in qualifying assets exceeds $2.5 million (up from $2 million). These amounts are annually adjusted for inflation, and they’re $1.02 million and $2.55 million, respectively, for 2019.
For passenger autos with a GVWR of 6,000 pounds or less, Sec. 179 expensing, combined with bonus and regular depreciation, cannot exceed $18,000. For SUVs between 6,000 and 14,000 pounds, expensing is limited to $25,000 — but this is a moot point through 2022 because 100% bonus depreciation generally can be taken for such vehicles.
Generally, for passenger autos with a GVWR of 6,000 pounds or less (and for other vehicles when 100% bonus depreciation isn’t available), deductions are taken in this order: Sec. 179 expense, bonus depreciation, regular depreciation. For each step, you reduce a vehicle’s depreciable basis by the appropriate amount (subject to applicable limits) and then apply the next deduction to the remaining basis, if any.
Review your circumstances
If you’re contemplating the purchase of a business vehicle, talk to your tax advisors about tax breaks that can reduce your costs. Enhanced deductions for luxury autos, bonus depreciation and Sec. 179 expensing allow you to accelerate depreciation deductions — thus improving your cash flow. •