Are you Planning to Purchase a Vehicle in 2019?
Do you plan to purchase a new or used (new to you) vehicle in 2019? If the vehicle is used primarily for business purposes, then significant first year deductions are available to your company. However, as with most things tax-related, the rules are a little complicated. Below, we’ll take a look at the different IRS code sections governing car depreciation deductions how each could impact your tax position.
Code Section 280F is titled Limitation on depreciation for luxury automobiles; limitation where certain property used for personal purposes. This title is the reason depreciation limits on cars are commonly referred to as “luxury auto” limitations. You are probably thinking we are talking about a Porsche or Ferrari when the IRS is referring to “luxury,” but actually that is not the case.
The term “luxury” is not specifically defined by the IRS, but it is essentially any passenger vehicle that is four-wheeled, manufactured primarily for street use and has an unloaded gross vehicle weight of 6,000 pounds or less. The definition for trucks and vans is slightly different (as we’ll discuss below) and might mean a number of them would not be subject to these depreciation limits. It’s important to keep in mind that the total amount deductible is limited.
For passenger automobiles placed in service in 2019, the luxury tax limits are as follows:
- Lesser of 20% or $10,100 for the first tax year in its recovery period (2019);
- $16,100 for the second tax year in its recovery period (2020);
- $9,700 for the third tax year in its recovery period (2021);
- $5,760 for each succeeding tax year in its recovery period (2022 and later years) and each year after its recovery period
Note that in the first year the limit is the lesser of 20% or $10,100. This means for vehicles not eligible for bonus, or that are subject to an election out of bonus, the limits do not apply unless the vehicle costs over $50,500. For vehicles placed in service after 2019, these limits will be adjusted for inflation.
It’s also important to note that under Sec. 179 an expense deduction can be taken for passenger automobiles, but the above limits apply to these expense deductions as well as regular depreciation. For example, the limit for regular passenger automobiles is $10,100, so the combined expense and regular depreciation deductions for a truck or van purchased in 2019 cannot exceed $10,100. Under the new tax law, taxpayers can take an expense deduction for new and used vehicles alike.
In addition, The Tax Cuts and Jobs Act (TCJA) modified the bonus depreciation rules by allowing 100% bonus depreciation for qualifying property placed in service before January 1, 2023. The TCJA also now allows depreciation on used property as long as its “new to you.” The bonus deduction is allowed for qualifying property in the first year it is placed in service. Passenger automobiles qualify for bonus depreciation if they are used more than 50% for business and the taxpayer did not elect out of bonus depreciation. Under these rules, the depreciation limit for a passenger automobile that qualifies for bonus depreciation is increased by $8,000 for the first tax year. This means that if the vehicle is eligible for bonus depreciation then the limit combined with the section 179 deduction would allow for first year expensing of up to $18,100 in 2019 ($10,100 + $8,000). The $8,000 amount is not adjusted for inflation.
Trucks and Vans Over 6,000 Pounds
Sec. 280F does not cover these vehicles, therefore there is no limit on regular and bonus depreciation for trucks and vans that do not qualify as passenger or “luxury” automobiles. The Sec. 179 expense deduction for trucks and vans rated at more than 6,000 pounds but not more than 14,000 pounds gross vehicle weight (loaded) is $25,000. And even then, certain trucks and vans in this weight class if the vehicle are not covered by this limitation. For example, if a taxpayer purchases a new large pickup with GVW between 6,000 and 14,000 pounds and the truck has a bed over 6 feet in interior length for $80,000 and uses it 100% for business, the business can claim a deduction for Sec. 179 depreciation and/or bonus depreciation of the full $80,000.
Various websites and tax research list vehicles over 6,000 pounds gross vehicle weight. The vehicles are also supposed to have this printed on the manufacturer’s label located on the inside edge of the driver’s side door where the door hinges meet the frame.
Sport Utility Vehicles (SUVs)
SUVs are considered trucks, so SUVs that are less than 6,000 pounds are subject to depreciation limits just like light trucks and vans. However, similar to trucks and vans, SUVs over 6,000 pounds and under 14,000 pounds gross vehicle weight (“Heavy SUVs”) are not subject to these limits. SUVs that fall into this category also qualify for the full amount of bonus depreciation allowed in the specific year. In addition, a Sec. 179 expense deduction of up to $25,000 can be taken for these heavy SUVs. Under the new 100% bonus rules, the business can claim a deduction for Sec. 179 depreciation and/or bonus depreciation of the costs of can be deducted in the year placed in service through December 31, 2022. Given this cost recovery benefit, it may be worth considering the purchase of one of these despite not being as practical as other vehicles.
Vehicles not discussed above such as heavy construction equipment, forklifts, “over-the-road” tractor trailers, etc. are not subject to the Sec. 280F limitations and are eligible for 100% 179 and/or bonus depreciation.
So as you can see, the deductibility of business vehicles is complicated and the rules vary depending on the type, weight, and design of each vehicle. Keep in mind these rules apply to vehicles used more than 50% for business purposes. Additional complications arise if the vehicle is used partially for personal use by an employee and an amount is not included in the employee’s income for that use.
Keeping these nuances in mind and being savvy when going into the purchase could result in a very favorable tax answer when considering the purchase of a new vehicle for your business. Keep in mind, this article is meant for general discussion purposes only, and we recommend you consult with a tax professional to address your unique situation before making any decisions.
For more information from the IRS on the 2019 limiations, visit: https://www.irs.gov/pub/irs-drop/rp-19-26.pdf