Did you add a vehicle for use in your small business last year? Or maybe this year? The 2017 Tax Cuts and Jobs Act (TCJA) included super-favorable first-year depreciation breaks for vehicles used for business. Those federal income tax breaks are still on the books, and I think they’ve not gotten all the attention they deserve. So please read this for the scoop.
Generous depreciation allowances for passenger vehicles
For both new and used passenger vehicles that are used over 50% for business, the TCJA dramatically and permanently increased the so-called luxury auto depreciation allowances. For vehicles that were “placed in service” (put to business use) last year, the maximum allowances are:
* $18,200 for Year 1.
* $16,400 for Year 2.
* $9,800 for Year 3.
* $5,860 for Year 4 and thereafter until the vehicle is fully depreciated.
The allowances listed above are for 100% business use. If you used your vehicle less than 100% but more than 50% for business last year, the allowances are proportionately reduced.
For vehicles placed in service in 2021, the maximum allowances listed above apply to vehicles that cost more than $51,000. For vehicles that cost less, the allowances are lower.
The allowances for 2022 will be increased to account for inflation, but we won’t know the exact numbers until later this year. With surging inflation, they should be significantly higher than the 2021 numbers.
Previous allowances for passenger vehicles were skimpy
Before the TCJA took effect back in 2018, the old-law maximum allowances for passenger vehicles were much smaller. For 2017, the limits $11,160 for Year 1 for a new car or $3,160 for a used car, $5,100 for Year 2, $3,050 for Year 3, and $1,875 for Year 4 and thereafter. Slightly higher limits applied to light trucks and light vans. The much-more-generous TCJA allowances are a huge improvement.
100% first-year bonus depreciation for heavy SUVs, pickups, and vans
Another TCJA change allows unlimited 100% first-year bonus depreciation for qualifying new and used assets that are acquired and placed in service between 9/28/17 and 12/31/22. However, a used asset cannot have been previously used by you or your business entity.
The 100% first-year bonus depreciation deal can have a hugely beneficial impact on first-year federal income tax depreciation deductions for both new and used heavy vehicles used over 50% in your business. That’s because heavy SUVs, pickups, and vans are treated for tax purposes as transportation equipment rather than passenger vehicles, and that means they qualify for 100% first-year bonus depreciation.
However, you must use a heavy vehicle over 50% for business for 100% first-year bonus depreciation to be available for the business-use percentage of the vehicle’s cost. Otherwise, you must depreciate the business-use percentage of the cost over a six-year period.
What counts as a heavy vehicle?
Good question. 100% first-year bonus depreciation is only available when an SUV, pickup, or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. Examples of suitably heavy vehicles include the Audi Q7, Buick Enclave, Chevy
Explorer, Jeep Grand Cherokee, Toyota
Sequoia, and lots of full-size pickups.
You can verify a vehicle’s GVWR by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame. Don’t expect dealer sales personnel to know which vehicles have GVWRs above 6,000 pounds. Check for yourself. Due diligence!
Example: A $60,000 deduction
In 2021, you bought a new $60,000 heavy SUV and used it 100% in your business last year. You can deduct the entire $60,000 on your 2021 business return or form, thanks to the 100% first-year bonus depreciation break. If you only used the vehicle 60% for business last year, your first-year bonus depreciation deduction is reduced to $36,000 (60% x $60,000). Still, not bad.
If you instead bought a used $45,000 heavy SUV, pickup, or van last year and used it 100% for business, you can deduct the entire cost on your 2021 business return or form, thanks to the 100% first-year bonus depreciation break — which is allowed for both new and used vehicles. If you only used the vehicle 60% for business, your first-year bonus depreciation deduction is reduced to $27,000 (60% x $45,000).
If you do the same things in 2022, the results will be the same.
Now for the bad news: no deductions for employee’s unreimbursed vehicle expenses
Now for the bad news. Some companies require employees to use their own vehicles for business-related travel. Before 2018, you could claim an itemized deduction for your total unreimbursed business-usage vehicle expenses, subject to a 2%-of-adjusted-gross-income (AGI) threshold for writing off miscellaneous itemized expenses.
For 2018-2025, the TCJA eliminated write-offs for miscellaneous itemized expenses that were subject to the 2%-of-AGI deduction threshold under prior law. So, for 2018-2025, an employee can no longer claim deductions for unreimbursed business-usage vehicle expenses. If this unfavorable change affected you, I hope and trust that you either negotiated a salary adjustment to compensate for the loss of the deduction or persuaded your employer to provide tax-free expense account reimbursements for the business percentage of your vehicle expenses.
The bottom line
Current federal income tax law allows generous depreciation deductions for vehicles used over 50% for business.
This is especially true for heavy SUVs, pickups, and vans that are placed in service by 12/31/22. These babies qualify for 100% first-year bonus depreciation. If you placed a heavy vehicle in service last year and used it over 50% for business, you can deduct the entire business-use percentage of the cost on your 2021 federal income tax return, thanks to the 100% first-year bonus depreciation break.
Caveat: Claiming 100% first-year bonus depreciation for an eligible vehicle is not a total no-brainer. If you believe tax rates will go up in future years, you could choose to forgo 100% first-year bonus depreciation and instead depreciate your heavy vehicle over several years. If tax rates go up, those future depreciation write-offs could turn out to be worth more than a current-year 100% bonus depreciation deduction. Or not. Take your best guess and act accordingly at tax return time.