May 3, 2018

The Tax Cuts and Jobs Act (TCJA) expands the first-year depreciation deductions for vehicles used more than 50% for business purposes. Here’s what small business owners need to know to take advantage.

Bad News for Employees with Unreimbursed Vehicle Expenses

The new tax law isn’t all good news. Under prior law, employees who used their personal vehicles for business-related travel could claim an itemized deduction for unreimbursed business-usage vehicle expenses. This deduction was subject to a 2%-of-adjusted-gross-income (AGI) threshold.

Unfortunately, for 2018 through 2025, the new tax law temporarily suspends write-offs for miscellaneous itemized expenses. So, an employee can no longer claim deductions for unreimbursed business-usage vehicle expenses incurred from 2018 through 2025.

There’s a possible work-around, however: Employers can provide tax-free reimbursements for the business percentage of employees’ vehicle expenses under a so-called “accountable plan” expense reimbursement arrangement. Contact your tax advisor to find out if an accountable plan could work for you.

Depreciation Allowances for Passenger Vehicles

For new and used passenger vehicles (including trucks, vans and electric automobiles) that are acquired and placed in service in 2018 and used more than 50% for business purposes, the TCJA dramatically and permanently increases the so-called “luxury auto” depreciation allowances.

The maximum allowances for passenger vehicles placed in service in 2018 are:

  • $10,000 for the first year (or $18,000 if first-year bonus deprecation is claimed),
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for the fourth year and beyond until the vehicle is fully depreciated.

If the vehicle is used less than 100% for business, these allowances are cut back proportionately. For 2019 and beyond, the allowances will be indexed for inflation.

First-Year Bonus Depreciation for Passenger Vehicles

If first-year bonus depreciation is claimed for a new or used passenger vehicle that’s acquired and placed in service between September 28, 2017, and December 31, 2026, the TCJA increases the maximum first-year luxury auto depreciation allowance by $8,000. So, for 2018, you can claim a total deduction of up to $18,000 for each qualifying vehicle that’s placed in service. Allowances for later years are unaffected by claiming first-year bonus depreciation.

There’s an important caveat, however: For a used vehicle to be eligible for first-year bonus deprecation, it must be new to the taxpayer (you or your business entity).

The $8,000 bump for first-year bonus depreciation is scheduled to disappear after 2026, unless Congress takes further action.

Prior-Law Allowances for Passenger Vehicles

These expanded deductions represent a major improvement over the prior-law deductions. Under prior law, used vehicles were ineligible for first-year bonus depreciation. In addition, the depreciation allowances for passenger vehicles were much skimpier in the past.

For 2017, the prior-law allowances for passenger vehicles were:

  • $3,160 for the first year (or $11,160 for a new car with additional first-year bonus depreciation),
  • $5,100 for the second year,
  • $3,050 for the third year, and
  • $1,875 for the fourth year and beyond until the vehicle is fully depreciated.

Under prior law, slightly higher limits applied to light trucks and light vans for 2017.

Good News for Heavy SUVs, Pickups and Vans

Here’s where it gets interesting: The TCJA allows unlimited 100% first-year bonus depreciation for qualifying new and used assets that are acquired and placed in service between September 28, 2017, and December 31, 2022. However, as explained earlier, for a used asset to be eligible for 100% first-year bonus deprecation, it must be new to the taxpayer (you or your business entity).

Under prior law, the first-year bonus depreciation rate for 2017 was only 50%, and bonus depreciation wasn’t allowed for used assets.

Heavy SUVs, pickups and vans are treated for tax purposes as transportation equipment — so they qualify for 100% first-year bonus depreciation. This can provide a huge tax break for buying new and used heavy vehicles that will be used over 50% in your business.

However, if a heavy vehicle is used 50% or less for nonbusiness purposes, you must depreciate the business-use percentage of the vehicle’s cost over a six-year period.

Definition of a “Heavy Vehicle”

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 Tahoe, Ford Explorer, Jeep Grand Cherokee, Toyota Sequoia and lots of full-size pickups.

You can usually verify the GVWR of a vehicle 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.

Case in Point

To illustrate the potential savings from the new 100% first-year bonus depreciation break, suppose you buy a new $65,000 heavy SUV and use it 100% in your business in 2018. You can deduct the entire $65,000 in 2018.

What if you use the vehicle only 60% for business? Then your first-year deduction would be $39,000 (60% x $65,000).

Now, let’s assume you purchase a used heavy van for $45,000 in 2018. You can still deduct the entire cost in 2018, thanks to the 100% first-year bonus depreciation break. If you use the vehicle 75% for business, your first-year deduction is reduced to $33,750 (75% x $45,000).

Buy, Use, Save

The TCJA provides sweeping changes to the tax law. Many changes are complex and may take months for practitioners and the IRS to interpret. But the provisions that expand the first-year depreciation deductions for business vehicles are as easy as 1-2-3: 1) buy a vehicle, 2) use it for business, and 3) save on taxes.

If you have questions about depreciation deductions on vehicles or want more information about other issues related to the new law, contact your tax advisor.

© 2018