By Kathi Koenig, CPA
I just bought a new car for business. How much of the cost can I deduct?” As a CPA, this is by far one of the most frequent questions I am asked. Unfortunately, there is no easy answer. But under the right circumstances it can be a sizeable deduction and with the Tax Cuts and Jobs Act (TCJA) that passed in December last year, it just got more beneficial.
Luxury autos purchased after December 31, 2017 and that are used over 50% for business have dramatically increased depreciation limits. The information below shows the substantial increase allowed for new and used passenger vehicles acquired in 2018.
$10,000 for Year 1, under previous law $3,160.
$16,000 for Year 2, previously $5,100.
$9,600 for Year 3, previously $3,050.
$5,760 for Year 4 and thereafter until fully depreciated, previously $1,875.
If bonus depreciation is taken in the first year, then up to $18,000 could be deducted. Under prior law, bonus depreciation could only be taken on new vehicles and the maximum was $11,160.
As you can see this is a substantial increase. However, keep in mind that this deduction is only for the business use of the vehicle. If the business usage of the vehicle is less than 100%, than the above deductions will decrease based on business use. If the use is less than 50%, the taxpayer is required to use a much slower straight-line depreciation method over 6 years.
Heavy vehicles such as SUV’s, pickups and vans are not subject to the luxury auto rules stated above. To be considered a “heavy” vehicle the Gross Vehicle Weight Rating (GVWR) must be over 6,000 pounds. The vehicle will usually have a manufacturer’s label on the inside edge of the driver’s door so that you can verify the GVWR of the vehicle.
Heavy vehicles are eligible for the Section 179 deduction that allows a taxpayer to expense the full amount of the purchase price in the year of purchase. Heavy SUV’s are limited to $25,000 of Section 179 deduction whereas the other heavy vehicles can take up to $1 million in Section 179 expense. However, Section 179 can be limited since there has to be taxable business income in order to take the deduction.
The really good news from the TCJA is that heavy vehicles are also eligible to take 100% bonus depreciation in the first year making the Section 179 rules irrelevant. Bonus depreciation is now eligible to be taken for new and used assets which includes heavy SUVs, pickups, and vans that are used over 50% for business.
One caveat to watch for with vehicles owned by a taxpayer’s Corporation, is if the vehicle is used by a shareholder-employee that owns 5% or more of the company, the vehicle has to be used over 50% in business activities. No personal use of the vehicle can count toward the 50% business amount even if the personal use is charged back to the employee as compensation.
Another caveat is that vehicles are considered listed property and as such are subject to stricter reporting requirements to prove business use. Each vehicle should have a mileage log. The log should show beginning and ending mileage to determine the total miles driven during the year as well as having a contemporaneous recording of miles driven during the year for business so that the business use percentage can be calculated.
As shown, deductions for a vehicle can get rather complicated and each situation is different. However, for nearly anyone in business who owns a vehicle there are deductions that can be taken. Be sure to consult your tax advisor on your personal situation to see how to maximize your deductions.
If you have recently purchased a vehicle or are thinking of buying one soon, keep these rules in mind to possibly “drive” your vehicle deductions up and slow down your tax liability.
Kathi Koenig, CPA | Partner