The IRS has recently provided a safe-harbor method to determine depreciation deductions for passenger automobiles that qualify for the 100% additional first-year depreciation deduction and that are subject to the depreciation limitations for passenger automobiles under Sec. 280F. More on that will follow below in this article, but the issuance serves as a good reminder to us that many things changed for the better under tax reform when it comes to small business owners using their cars for business. Here are 5 tax provisions every small business owner should understand about using their car for work.
Section 179 Expense Deduction
Section 179 is a tough nut to crack, and that’s why we’ve covered it so much in the past. Here, however, we’ll talk about it as it relates to vehicles.
If you purchased a new car in 2018 and use it more than 50% for business use, this deduction is for you. Under Section 179 you can immediately deduct (rather than depreciate) the cost of certain property in the year it is placed into service. For the 2018 tax year, the Section 179 expense deduction increases to a maximum deduction of $1M of the first $2.5M of qualifying equipment placed in service during the tax year. (Note, it is indexed to inflation for tax years after 2018.)
For SUVs, defined as a 4-wheel passenger vehicle between 6,000 and 14,000 pounds, the maximum deduction is $25,000. This number is also linked to inflation.
Certain restrictions apply, however, such as a seating capacity of more than 9 and vehicles weighing more than 14,000 pounds -- both of those are likely “work vehicles” and not used for personal reasons. Accordingly, there is no expense deduction limit there. Using bonus depreciation and/or Section 179, you may be able to deduct all or most of the cost of such a vehicle in a single year. This is a potentially enormous deduction for business people who purchase heavy SUVs and similar vehicles for their business.
Additional First-Year Bonus Depreciation for Passenger Vehicles
The Tax Cuts and Jobs Act (TCJA) permits additional first-year depreciation (bonus depreciation) for qualified property, which includes passenger automobiles, acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2027.
Yesterday, the IRS provided a safe-harbor method to determine depreciation deductions for passenger automobiles that qualify for the 100% additional first-year depreciation deduction and that are subject to the depreciation limitations for passenger automobiles under Sec. 280F.
Deductions under Sec. 179, which provides an election to expense certain depreciable business assets, are also subject to Sec. 280F when they involve passenger automobiles. The safe harbor does not apply when the taxpayer elects Sec. 179 treatment.
Here’s what changed yesterday:
For a passenger automobile that qualifies for the 100% additional first-year depreciation deduction, the TCJA increased the first-year limitation amount by $8,000 to $18,000. If the depreciable basis of a passenger automobile for which the 100% additional first-year depreciation deduction is allowed exceeds the first-year limitation in Rev. Proc. 2018-25, the excess amount is deductible in the first tax year after the end of the recovery period.
The safe harbor allows depreciation deductions for the excess amount during the recovery period subject to the depreciation limitations that apply to passenger automobiles. To implement the safe-harbor method, the taxpayer must use the depreciation table in Appendix A of IRS Publication 946, How to Depreciate Property. The safe-harbor method does not apply to a passenger automobile placed in service after 2022, one for which the taxpayer elected out of the 100% bonus depreciation, or one for which the taxpayer elected under Sec. 179 to expense all or part of the automobile’s cost.
To adopt the safe-harbor method in the revenue procedure, taxpayers apply it to their depreciation deduction for a passenger automobile on their return for the first tax year following the placed-in-service year.
First-Year Bonus Depreciation for Heavy Vehicles
Heavy vehicles (new or used) placed into service after September 27, 2017, and before January 1, 2023, qualify for a 100% first-year bonus depreciation deduction as well, if business-related use exceeds 50%. These deductions are based on the percentage of business use, and vehicles used less than 50% for business are required to depreciate the vehicle cost over a period of six years.
Luxury Auto Depreciation Allowance
Luxury passenger vehicles placed into service after December 31, 2017, can be depreciated to a maximum amount as follows:
- $10,000 for the first year
- $16,000 for the second year
- $9,600 for the third year
- $5,760 for the fourth year and onward
Deductions are based on the percentage of business use. In other words, a business owner who uses the vehicle for work 100% of the time can take the full deduction while an owner who only uses the car for work a certain percentage of time can take less. These amounts are also indexed for inflation.
Unreimbursed Expenses for Business Use of a Vehicle
Now, here’s the bad news. Under tax reform, miscellaneous itemized expenses, including unreimbursed expenses for business use of a car, were eliminated. So, 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’re out of luck. You can no longer claim a deduction for such expenses on your tax return.
These are complicated matters, and we don’t recommend that you tackle them alone. Feel free to give us a call to discuss your situation. We’re happy to help.
Interested in learning more ways the TCJA changed the tax code for individuals and businesses? Let's connect!.