Under the Tax Cuts and Jobs Act of 2017, several new rules went into effect regarding the Section 179 expense deduction that improve your opportunity to take a more immediate and or larger deduction on cars used for business purposes.
Below are five rules you should know. For further information and guidance on these rules, contact the Weiss & Company LLP tax team.
Expense Deduction for Business Use
If you bought a new car in 2018, and used it more 50 percent of the time for business use, you can take advantage of the Section 179 expense deduction when you file your 2018 tax return. Under Section 179, you can immediately deduct (rather than depreciate) the cost of certain property in the year it is placed in service. In 2018, the Section 179 expense deduction increases to a maximum deduction of $1 million, if you have no more than $2.5 million of qualifying equipment placed in service during the year. It is indexed to inflation for tax years after 2018.
For sport utility vehicles (defined as four-wheeled passenger automobiles between 6,000 and 14,000 pounds), however, the maximum deduction is $25,000 (also indexed for inflation). Certain exceptions may apply, including seating capacity of more than nine persons behind the driver’s seat. Vehicles weighing more than 14,000 pounds are typically considered “work vehicles” and would not be used for personal reasons. As such, there is no expense deduction limit for those vehicles.
Luxury Auto Depreciation Allowance
For luxury passenger automobiles placed in service after 2017, the cap on allowable depreciation has increased to a maximum of $10,000. The cap increases to $16,000 for the second year, then decreases to $9,600 for the third year and $5,760 for the fourth year and for years beyond. These dollar amounts will be indexed for inflation in the future. Deductions are based on a percentage of business use. For example, a business owner whose business use of the vehicle is 100 percent can take a larger deduction than one whose business use of a car is only 50 percent.
Additional First-Year Bonus Depreciation for Passenger Vehicles
For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. It applies to new and used (“new to you”) vehicles acquired and placed in service after September 27, 2017, and remains in effect for tax years through December 31, 2022. When combined with the increased cap on the depreciation allowance above, the deduction can amount to as much as $18,000.
100 Percent First-Year Bonus Depreciation for Heavy Vehicles
For tax purposes, pickup trucks, vans, and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 pounds are treated as transportation equipment instead of passenger vehicles. Heavy vehicles (new or used) placed into service after September 27, 2017, and before January 1, 2023, qualify for a 100 percent first-year bonus depreciation deduction as well, if business-related use exceeds 50 percent. These deductions are based on percentage of business use, and vehicles used less than 50 percent for business are required to depreciate the vehicle cost over a period of six years.
Deductions Eliminated for Unreimbursed Expenses for Business Use of a Car
Under tax reform, miscellaneous itemized expenses were repealed. As such, starting in 2018, if you are an employee who is required to use your own vehicle for business-related use and are not reimbursed for these expenses by your employer, you are no longer able to claim a deduction for unreimbursed expenses for business use of a car on your tax return.
There are just a few highlights of the new tax rules. If you have more questions or need assistance, Jim Hamilton and our tax team are available and happy to help with all your tax needs.