Are you thinking about writing off a new car purchase for your business? Have you done your homework? Does it meet the obscure Section 179 requirements to be fully deductible on your tax return? Maybe it only qualifies for a certain deduction percentage or is limited to how much can be deducted because of the type of vehicle.
In 2018 there were many changes to the tax laws, some which will be largely beneficial for individuals and those with a small business. This holds true for writing off vehicle purchases for business use. Now there’s an even greater advantage to purchasing a vehicle for your business due to the increased ability to immediately expense a vehicle in full on your 2018 taxes. If you are interested in learning how you can get a tax write off on a car purchase then read on!
Expensing a Vehicle Using the Section 179 Deduction
Section 179 property includes computers, software, office equipment, office furniture, and other equipment or tangible personal property purchased for business use. Under the new tax law, taxpayers can elect to immediately deduct the cost of this property in the year the property was placed in service, up to $1 million (which is up from $500,000). The phase-out threshold of this deduction increased in 2018 from $2 million to $2.5 million. Property is also eligible for 100% bonus depreciation if placed in service after September 27, 2017. Of course, for any of this to apply, the property can’t be purchased from a related party and the taxpayer cannot have previously used the property for any other purpose prior to acquiring it for the business. This applies to business vehicles as well.
Luxury Vehicles: Defined
When looking into the new vehicle deduction laws first things first, what vehicles are we talking about here? A luxury vehicle to most people is considered a high-end pricey purchase. Although these vehicles will still follow the same rules, the IRS has a more relaxed definition of the term luxury. Unfortunately for taxpayers, by the IRS’ standard, the majority of all cars are considered “luxury” regardless of their actual costs. The IRS states that a luxury vehicle is four-wheeled, mostly used on public roads, and has an unloaded gross weight of 6,000 pounds or less. Ever Googled your car’s weight? We have, and by far most qualify for this definition. Interesting how that Honda Civic is a luxury vehicle…
Annual Depreciation Cap
The depreciation allowance for the cost of buying a new vehicle is subject to an annual cap. For new to you (can be purchased as used or new) passenger vehicles that are acquired and placed in service after December 31, 2017, and used over 50% for business, the TCJA dramatically increases this allowance. For year 1, the maximum allowance is $10,000 (without claiming bonus depreciation, as described below). If you don’t use the vehicle 100% for business, these allowances are cut back proportionately. For example, a 50% use vehicle would have a maximum allowance of $5,000 on your business taxes.
PLUS Bonus Depreciation
Bonus depreciation can now be elected for a 100% deduction. If you decide to claim first-year bonus depreciation, the TCJA increases the maximum first-year depreciation allowance by $8,000, which brings your total allowance to $18,000 for 2018, year 1. This $18,000 figure is up from $11,160 which was allowed in previous years. Remember, the vehicle cannot have been previously used by you or your business and must have been placed in service after September 27, 2017 in order to take advantage of the 100% bonus depreciation.
For comparison sake, we made a handy chart to illustrate the total depreciation deduction allowable by year under the old law and new law:
As you can see, the tax law change had a profound impact when it comes to purchasing business use vehicles. Timing is everything and rushing that deduction into 2017 may have worked against you in 2018. If you have purchased a vehicle (or any property for that matter) for your business in 2018 be sure to tell the best CPA in Atlanta, GA about your purchases so that you can take full advantage of these new tax deduction rules. Whether you are a business owner or not, contact us to understand the impacts. If you have any questions always feel free to reach out to our accounting firm and let us know.