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Updated Guidance on Business Vehicle Depreciation

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The rules for deducting depreciation expenses on vehicles used for business purposes have been liberalized under current tax law, but they remain complicated. In addition, annual inflation adjustments make allowable depreciation deductions moving targets. (See "First-Year Depreciation Deductions under the TCJA," below.) Here's how to calculate depreciation deductions for cars, SUVs, pickups and vans used in your business.

2 Methods for Deducting Business Vehicle Expenses

Business owners must choose between the following two methods for claiming allowable business-use vehicle deductions:

  1. Cents-per-mile method. For 2024, the standard mileage rate is 67 cents per business mile for 2024 (up from 65.5 cents for 2023). This rate is meant to cover all business vehicle expenses, such as gas, maintenance, repairs, tires and insurance.

Important: A depreciation allowance is also built into the standard rate.

  1. Actual expense method. Depreciation calculations come into play only if you choose this method. As the name suggests, the more time-consuming actual expense method tracks all vehicle-related costs based on the amount you actually paid. Depreciation is a noncash expense, so it requires specific calculations under the tax rules.

You can add actual expenses for parking and fees if you use the standard mileage rate. But your deductions will usually be higher under the actual expense method than under the cents-per-mile method. If you choose to use the actual expense method, the rules for calculating depreciation write-offs vary depending on the type of vehicle you're using in your business. 

First-Year Depreciation Deductions under the TCJA

The Tax Cuts and Jobs Act (TCJA) included good news for taxpayers that use cars, SUVs, pickups and vans for business purposes. Specifically, it permanently liberalized the Section 179 first-year depreciation rules. It also temporarily expanded the first-year deductions for bonus depreciation, along with other favorable changes to the depreciation rules for vehicles used more than 50% for business.

Expanded Sec. 179 deductions. For qualifying property placed in service in tax years beginning after December 31, 2017, the maximum Sec. 179 deduction increased to $1 million (up from $510,000 for tax years beginning in 2017) and the Sec. 179 deduction phaseout threshold increased to $2.5 million (up from $2.03 million for tax years beginning in 2017). These limits are adjusted annually for inflation.

For the 2024 tax year, the inflation-adjusted maximum Sec. 179 deduction is $1.22 million (up from $1.16 million for 2023). For the 2024 tax year, the Sec. 179 deduction phaseout threshold increased to $3.05 million (up from $2.89 million for 2023).

More generous first-year bonus depreciation. Under the TCJA, for qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increased to 100% (up from 50% in 2017). The 100% deduction was allowed for both new and used qualifying property.

The first-year bonus depreciation deduction was reduced to 80% for property placed in service in calendar year 2023. It has further decreased to only 60% for property placed in service in calendar year 2024.

In later years, the first-year bonus is scheduled to be reduced as follows:

  • 40% for property placed in service in calendar year 2025, and
  • 20% for property placed in service in calendar year 2026.

Important: For certain property with longer production periods, the preceding cutbacks are delayed by one year. For example, the 80% deduction rate will apply to properties with long production periods that are placed in service in 2024.

Rules for Depreciating Passenger Autos

For a passenger auto that's used over 50% for business, you generally must make a depreciation calculation for each year until the vehicle is fully depreciated. Passenger auto means a vehicle that's intended for use on public roads and that has a gross vehicle weight rating (GVWR) of 6,000 pounds or less. In addition to cars, this definition captures quite a few SUVs and pickups. You can usually find the GVWR on a label on the inside edge of the driver-side door where the hinges meet the frame.

According to the general rule for depreciating passenger autos used for business, you can write off the business-use portion of the cost over six years. However, for relatively expensive passenger autos used over 50% for business, allowable depreciation deductions are subject to annual ceilings under the so-called "luxury" auto depreciation limits. If you claim first-year bonus depreciation for a new or used passenger auto used over 50% for business, the maximum first-year luxury auto depreciation allowance is increased by $8,000. However, to claim first-year bonus depreciation for a used vehicle, it must be new to you.

The maximum luxury auto depreciation deductions for a passenger auto placed in service in 2024 are as follows:

  • $20,400 for year 1 if bonus depreciation is claimed ($12,400 if bonus depreciation isn't claimed),
  • $19,800 for year 2,
  • $11,900 for year 3, and
  • $7,160 for year 4 and thereafter until the vehicle is fully depreciated.

For passenger autos placed in service in 2024, the luxury auto depreciation limits only affect vehicles that cost $70,000 or more if first-year bonus depreciation is claimed. If bonus depreciation isn't claimed, the luxury auto depreciation limits only affect vehicles that cost $62,000 or more.

If you haven't yet completed your 2023 tax return (because you filed an extension), you might be interested in reviewing last year's inflation-adjusted limits. The maximum luxury auto depreciation deductions for a luxury passenger auto placed in service in 2023 are as follows:

  • $20,200 for year 1 if bonus depreciation is claimed ($12,200 if bonus depreciation isn't claimed),
  • $19,500 for year 2,
  • $11,700 for year 3, and
  • $6,960 for year 4 and thereafter until the vehicle is fully depreciated.

For passenger autos placed in service in 2023, the luxury auto depreciation limits only affect vehicles that cost $69,000 or more if first-year bonus depreciation is claimed. If bonus depreciation isn't claimed, the luxury auto depreciation limits only affect vehicles that cost $61,000 or more.

Important: The luxury auto depreciation ceilings are proportionately reduced for any nonbusiness use. For instance, if your business-use percentage is 60%, the ceilings are 60% of the amounts listed above. 

Less-expensive vehicles used over 50% for business are depreciated over six years as follows:

  • 20% of the business-use portion of the cost in year 1,
  • 32% in year 2,
  • 19.2% in year 3,
  • 11.52% in year 4,
  • 11.52% in year 5, and
  • 5.76% in year 6.

If a nonluxury vehicle is used 50% or less for business, you must use the slower straight-line method to calculate your depreciation deductions.

Rules for Depreciating Heavy Vehicles

Much more favorable depreciation rules apply to heavy SUVs, pickups and vans that are used over 50% for business. These vehicles are classified as transportation equipment for federal income tax purposes. Heavy means a vehicle with a GVWR above 6,000 pounds. Quite a few SUV and pickup models pass this test.

Section 179 deductions. Because heavy SUVs, pickups and vans are considered transportation equipment, many small and medium-sized businesses can deduct most or all of the business-use portion of their cost in the first year they're placed in service under the Sec. 179 deduction.  For tax years beginning in 2024, the inflation-adjusted maximum Sec. 179 deduction is $1.22 million (up from $1.16 million for tax years beginning in 2023).

However, the inflation-adjusted limit on Sec. 179 deductions for heavy SUVs with GVWRs between 6,001 and 14,000 pounds is $30,500 for tax years beginning in 2024 (up from $28,900 for tax years beginning in 2023). These limits don't apply to heavy vehicles that aren't classified as SUVs, including:

  • Vehicles designed to seat more than nine passengers behind the driver's seat. For example, many shuttle vans qualify for this exception.
  • Vehicles equipped with a cargo area that's not readily accessible directly from the passenger compartment and that's at least six feet in interior length. The cargo area can be open or designed to be open but enclosed by a cap. For example, many pickups with full-size cargo beds qualify for this exception. Some quad cabs and extended cabs with shorter cargo beds may not.
  • Vehicles with 1) an integral enclosure that fully encloses the driver's compartment and load carrying device, 2) no seating behind the driver's seat, and 3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. For example, many delivery vans qualify for this exception.

Vehicles with GVWRs above 6,000 pounds that fall under the preceding non-SUV exceptions are eligible for the full Sec. 179 deduction privilege. That means the business portion of the cost of many heavy non-SUVs can often be fully written off in the first year they're placed in service under the Sec. 179 deduction privilege.

Bonus depreciation. Heavy SUVs, pickups and vans, which are considered transportation equipment, are also eligible for first-year bonus depreciation deductions. The first-year bonus depreciation deduction was reduced to only 60% for heavy vehicles placed in service in calendar year 2024. (It was 80% in calendar year 2023.) To be eligible for first-year bonus depreciation, a used vehicle must be new to the taxpayer.

Sec. 179 Deduction vs. Bonus Depreciation

While the current rules for Sec. 179 deductions are generous, watch out for the following restrictions:

  • The business taxable income limitation,
  • The Sec. 179 deduction phaseout rule,
  • The limited Sec. 179 deduction for SUVs, and
  • Sec. 179 deduction limitation rules for vehicles owned by pass-through entities, including limited liability companies (LLCs), partnerships and S corporations.

These Sec. 179 limitations are beyond the scope of this article. Your SSB tax advisor can provide additional details.

On the other hand, first-year bonus depreciation deductions aren't subject to any complicated limitations. But for heavy vehicles placed in service in 2024 and 2023, the bonus depreciation percentages are only 60% and 80%, respectively.

In general, you should write off as much as possible of the business-use portion of your heavy vehicle's cost under your allowable Sec. 179 deduction. Then, claim first-year bonus depreciation for the remainder of the business-use portion of the cost.   

To illustrate, suppose Leona buys a heavy SUV for $80,000 in 2024. She uses it 100% in her single-member LLC that's treated as a sole proprietorship for tax purposes. How much of the vehicle's cost can Leona deduct on her personal tax return?

She can deduct the first $30,500 of the SUV's cost in 2024, under the limited Sec. 179 deduction for heavy SUVs. She also can claim a first-year bonus depreciation deduction in 2024 equal to 60% of the remaining cost of $49,500 ($80,000 minus $30,500). Her bonus depreciation for the year would be $29,700 (60% times $49,500). So, for 2024, her total depreciation write-off for the vehicle would be $60,200 ($30,500 plus $29,700).

How much can Leona deduct if the heavy vehicle is a long-bed pickup that's not classified as an SUV?  If we assume that none of the Sec. 179 deduction limitations apply to Leona, she can deduct the entire $80,000 on her 2024 tax return, thanks to the Sec. 179 deduction privilege.

Get It Right

The federal income tax rules for calculating depreciation for vehicles used in your business can be complex. If you have questions or want more information, contact your SSB tax advisor.

©  2024

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