The Tax Cuts and Jobs Act (TCJA) has plenty of good news for small businesses and their owners, including a very favorable first-year depreciation break for vehicles used for business. These breaks have not gotten much attention. Today's blog will not only bring you up to speed on what you need to know for vehicles purchased or put into service after 9/28/17, but it also provides a DOWNLOADABLE calculator that will help you understand how the depreciation will affect your out-of-pocket costs.
The Primary Changes to Business Vehicle Depreciation in the Tax Reform Act of 2018:
1. Increased depreciation allowances for passenger vehicles
For both new and used passenger vehicles that are acquired and placed in service after 9/28/17 and used over 50% for business, the new tax reform dramatically and permanently increases the so-called luxury auto depreciation allowances. For vehicles placed in service (put to business use) in 2018, the maximum allowances are:
- $10,000 for Year 1 or $18,000 if you claim first-year bonus depreciation (see below).
- $16,000 for Year 2
- $9,600 for Year 3
- $5,760 for Year 4 and thereafter until the vehicle is fully depreciated
If you don’t use the vehicle 100% for business, these allowances are cut back proportionately.
Want to know how this could impact your finances immediately?
Download our Vehicle Tax Benefits Calculator:
Additional first-year bonus depreciation for passenger vehicles
If you claim first-year bonus depreciation for a new or used passenger vehicle that is acquired and placed in service between 9/28/17 and 12/31/26, the new tax reform increases the maximum first-year luxury auto depreciation allowance by $8,000 (from $10,000 to $18,000 for 2018).
A large exception: a used vehicle cannot have been previously used by you or your business entity; it must be new to you or the entity.
The $8,000 increased bonus depreciation is set to go away after 2026, unless Congress takes further action.
2. 100% first-year bonus depreciation is allowed for heavy SUVs, pickups, and vans used over 50% for business
The new tax reform 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. The same exception as above remains: a used vehicle cannot have been previously used by you or your business entity; it must be new to you or the entity. Under prior law, the first-year bonus depreciation rate for 2017 was only 50%, and bonus depreciation was not allowed for used assets.
The new law’s 100% first-year bonus depreciation deal can have a hugely beneficial impact on first-year depreciation deductions for 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.
To qualify your for this extra depreciation, you must use this heavy vehicle over 50% for business. Otherwise, you must depreciate the business-use percentage of the vehicle’s cost over a six-year period.
Heavy vehicle definition
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 Jeep Grand Cherokee, Chevy Tahoe, Ford Explorer, Audi Q7, Toyota Sequoia, and lots of full-size pickup trucks.
You can usually 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. TIP: make sure to check this yourself before purchasing a vehicle–do not rely solely on what the sales personnel say at the dealership!
In 2018, you buy a new or used $60,000 heavy SUV and use it 100% in your business. You can deduct the entire $60,000 in 2018 thanks to the new 100% first-year bonus depreciation break. If you only use the vehicle 70% for business, your first-year bonus depreciation deduction is $42,000 (70% x $60,000).
The Bottom Line
The new tax reform dramatically increases the first-year depreciation deductions for vehicles used more than 50% for business.
Understanding How Depreciation Affects Your Out-of-Pocket Costs
We've created our very own Vehicle Tax Benefits calculator! By changing the parameters for the type of vehicle you are interested in purchasing for your business, you can get a better idea of how much you can actually save. Check it out by clicking the button below:
DISCLAIMER: Each financial situation is different. This advice is intended to be general. Please contact your financial or legal advisory for information specific to your situation.