*Editor’s Note: This blog was originally posted May 29, 2018 but has been updated as of September 16, 2019 for accuracy and comprehensiveness.

Attention small business owners…The recently passed Tax Cuts and Jobs Act, or TCJA expands a popular tax break used by many organizations….the 5 year depreciation deduction for vehicles. Want to take advantage? Read on to see if you qualify.

More about the deduction

Did you acquire a truck, van or automobile and place it in service in 2018? Do you use the vehicle for business purposes 50% of the time?

The luxury auto depreciation allowance is for you!

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 depreciation is claimed.) This is up from $3,160 previously allowed.
• $16,000 for the second year (up from $5,100 previously allowed)
• $9,600 for the third year (up from $3,050 previously allowed)
• $5,760 for the fourth year and beyond (until the vehicle is fully depreciated.) This is up from $1,875 allowed under prior law.

What if the vehicle is used for less than 100% of business?

In this case, these allowances are cut back proportionately. They will be indexed for inflation from 2019 and beyond.

First year bonus depreciation for passenger vehicles

Bonus depreciation is a tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible business assets. Bonus depreciation is always taken immediately, in the first year that the depreciable item is placed in service (hence the name “first year bonus depreciation”). For 2018, you can claim a total deduction of up to $18,000 for each qualifying vehicle that’s placed in service.

Can a used vehicle be eligible for first year bonus depreciation?

Yes, as long as it is new to the taxpayer (you or your business entity).

Heavy SUVs, pickups and vans…different rules apply.

For tax purposes, heavy SUVs, pickup trucks and vans are treated as transportation equipment, meaning they qualify for 100% first year bonus depreciation. Note that they must have a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 lbs.

If a heavy vehicle is used 50% or less for nonbusiness purposes, you have to depreciate the business use percentage of the vehicle’s cost (over a six year period).

Picture this….

Let’s say you buy a new $65,000 Chevy Tahoe and use it 100% for business. In 2018, you’ll be able to deduct the full $65,000.

If you use it for business only 60% of the time, you would be able to deduct $39,000 the first year ($65,000 x .60).

Again, same rules apply for used vehicles (if they are “new” to you or your business).

Can Section 179 be used for passenger vehicles?

Yes, however, it is less taxpayer-friendly than the bonus depreciation rules. The first year allowance is still $18,000 (same as bonus depreciation) however the remaining cost basis cannot be deducted until the vehicle’s depreciable life has expired. There are also state differences which need to be considered before making a final determination as to which method may be best for you and your business.

Key takeaway

Essentially, if you buy a vehicle and use it for business, there is likely an opportunity to save on taxes. Make sure you consult with your tax advisor to ensure that you are reporting correctly and taking advantage of all deductions and tax breaks available to you.

Contact our Tax Services Team for more information.

For more tax reform updates, be sure to visit our Tax Reform Center- your “one stop shop” for all things Tax Cuts and Jobs Act (TCJA) related.