New Depreciation Rules Could Mean More Passenger Vehicles for Business Use

Tax season is upon us, and with it invariably come over-the-top car commercials exhorting businesses to take advantage of the opportunity for a write-off. But can a business really write-off the purchase of a company car? I wish the answer were as clear cut as “Sure it can!,” but unfortunately, there are many rules when it comes to depreciation. This article will tackle depreciation as it relates to passenger vehicles.

Definition of a Passenger Vehicle

The first thing to know is that there are multiple classes of automobiles for purposes of tax depreciation, each of which has its own definitions and limitations. For simplicity’s sake, we will stick to one type: the passenger vehicle. A passenger vehicle is defined by the IRS as any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight. Some other restrictions include, but are not limited to, buses with capacity of 20 or more passengers, emergency vehicles such as police and fire vehicles, hearses, tractors or other specialty farm vehicles, and many others.

Depreciation Limits

IRS Code Section 280F places limits on depreciation as it relates to certain passenger vehicles. The Code sets a limit on the amount of depreciation that can be taken in a single year.

Depreciation was previously limited to $2,560 in the first taxable year; $4,100 in the second year; $2,450 in the third year and $1,475 in each subsequent year until the vehicle was fully depreciated. The Tax Cuts and Jobs Act (TCJA) and the recently issued IRS Revenue Procedure 2019-13 raised the yearly deprecation limits to $18,000 in the first year; $16,000 in the second year; $9,600 in the third year; and $5,760 in each subsequent year until the cost of the vehicle has been recovered.

However, with these new limits came a new rule stating that any amounts of depreciation exceeding the $18,000 limit will be considered unrecovered basis. The unrecovered basis is not eligible to be depreciated until after the useful tax life of your vehicle, which the IRS defines as five years. This will result in four years of no depreciation after the initial tax year, following which you will be able to begin depreciating the remaining cost of your vehicle.

The new rules also allow those depreciating a vehicle with 100% bonus depreciation to continue depreciating the unrecovered basis in subsequent tax years, subject to the limits outlined in IRC 280F. This rule applies only to 100% bonus depreciation and unfortunately does not apply to section 179, which means you will still lose the next four years of depreciation and not be able to continue depreciation of your vehicle until the end of its estimated useful tax life.

What This Means for You

Due to the changes in the Internal Revenue Code, the amount of depreciation that can be claimed in the first year, as it relates to regular depreciation, bonus depreciation, or section 179, has increased. Unfortunately, that does not mean the whole expense can be taken in the first year. So the next time you see one of those annoying ads saying you can expense your car, just know that when it comes to passenger autos, you can only deduct up to $18,000. On the bright side, however, if they are talking about trucks, that is a whole other story, and your Marcum tax professional would be glad to help you understand just what that means!