Tax Reform: Favorable Depreciation Deductions for Business Vehicles
Considering purchasing a new business vehicle? 2018 may be a good time to do so. Thanks to the Tax Cuts and Jobs Act (TCJA), favorable changes in depreciation rules have been put in place for certain capital expenditures, including vehicles purchased for business use.
Luxury Auto Limits
Special depreciation rules, known as the ‘luxury auto limits’, have been in place for several years. These rules apply to passenger autos, vans and light trucks. Under old law, for most passenger autos, these rules limited first year depreciation to $3,160. For light trucks and vans, these rules limited first year depreciation to $3,560. Now, under the TCJA, the luxury auto limits have increased and now allow a first year deduction of $10,000.
Another taxpayer friendly provision of the TCJA is the allowance of 100% bonus depreciation on qualifying assets. Prior to the TCJA, bonus depreciation (or immediate expensing) of 50% of the cost of new assets was allowed. Under the TCJA, a business can qualify for 100% bonus depreciation on qualifying assets, including assets that are used. Although passenger autos and light trucks and vans have special rules that disallow them from qualifying for 100% bonus depreciation, the IRS will allow an additional first year deduction of $8,000. Therefore, even with the luxury auto limits and the cap on bonus depreciation in place, thanks to the TCJA, taxpayers can now get a first year deduction of $18,000 on the purchase of ‘small’ vehicles.
Heavy Trucks and SUVs
To get the greatest tax benefit from the purchase of a vehicle, consider a “heavy” truck or SUV. Heavy trucks and SUVs are exempt from the luxury auto limitations and the bonus depreciation caps. The TCJA allows 100% bonus depreciation for heavy autos, allowing qualified purchases to be fully deducted in the year of purchase. A heavy truck or SUV is one with a Gross Vehicle Weight (GVWR) greater than 6,000 pounds. The list of qualified “heavy” vehicles is quite long and includes several mid-sized SUV’s that might be better suited for businesses that don’t necessarily need large trucks.
In conjunction with 100% bonus depreciation rules, heavy trucks and SUV’s also qualify for a $25,000 deduction under the immediate expensing rules of Section 179. Other than being indexed for inflation, this rule was not changed by the TCJA.
As the saying often goes, we never want the tax tail to wag the dog. However, if you are contemplating the purchase of a business vehicle in 2018, being aware of the depreciation rules and limitations could give rise to greater tax savings. Please contact us if you have any questions about the limitations on depreciation deductions for the purchase of a vehicle.
If you have any questions, please contact Sara Knoper at 616-458-1835 or SKnoper@bakerholtz.com
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