Purchases of new and used commercial vehicles are eligible for tax exemptions per the current tax law. Some vehicles may be eligible for higher deductions than others.
The first year Depreciation Break
The TCJA allows unlimited 100% first-year bonus depreciation for eligible new and used goods (including eligible vehicles) acquired and put into service between September 28, 2017, and December 31, 2022. However, for an asset used to qualify for 100% bonus depreciation in the first year, it must be new to the taxpayer (you or your business).
The TCJA also permanently increased the expenditure limit under Section 179 for the purchase of qualifying assets from $500,000 in 2017 to $1 million for fiscal years beginning in 2018 and beyond. However, this break was phased out for qualifying purchases of more than $2.5 million in 2018 (up from $2 million in 2017).
These amounts will be adjusted annually to inflation for years after 2018. The inflation-adjusted 2020 figures are $1.04 million and $2.59 million, respectively. The inflation-adjusted figures for 2021 are $1.05 million and $2.62 million.
Section 179 expenses for acquiring eligible assets are phased out for a dollar for dollar basis for purchases that exceed the limit value. Therefore, no deduction is available from Sect. 179 if the total investment in qualifying properties exceeds $ 3.63 million in 2020 ($3.67 million in 2021).
Heavy vehicles
Heavy SUVs, vans, and pickups are treated as means of transportation for tax purposes. Therefore, they are eligible for 100% first-year bonus depreciation and Section 179 expenses if more than 50% is used for business. This can offer a considerable tax reduction for the purchase of new and used heavy vehicles.
However, if a heavy-duty vehicle is used 50% or less for commercial purposes, the commercial use percentage in the vehicle's cost must be depreciated over six years.
To illustrate the potential savings with these first-year tax cuts, let's say you buy a new heavy SUV for $81,000 and use it 100% for your business in 2020. You can deduct $ 81,000 in 2020 due to a 100% depreciation bonus, the first year privilege. If you only use the vehicle 75% for business purposes, the deduction for the first year will be $ 60,750 (75% x $ 81,000).
To be considered a 'heavy-duty' vehicle, an SUV, truck, or van must have a Gross Vehicle Weight Rating (GVWR) of over 6,000 pounds. You can check a vehicle's GVWR by examining the manufacturer's label, which is usually found on the inside edge of the driver's door.
Garden variety passenger vehicles
Tax exemptions for cars (defined to include light SUVs, vans, and pickups) are less generous than those for heavy vehicles. The depreciation limits for cars purchased after September 27, 2017, and put into service in 2020 are:
$10,100 for the first year ($18,100 with additional depreciation),
$ 16,100 for the second year,
$ 9,700 for the third year
$ 5,760 for each subsequent year.
If the vehicle is used for less than 100% for business, these deductions are reduced proportionately.
For a vehicle to qualify for these tax exemptions, more than 50% must be used for business purposes. The taxpayer must not exclude the property class's deductions, which includes cars (five years of ownership).
Are you thinking of leasing?
Commercial use of a leased vehicle may be tax-deductible. If a leased vehicle is used 100% for business purposes, the full rental cost is deductible as a normal business expense. However, employers of more expensive vehicles must include a certain amount in their annual rent to partially offset the rent deduction.
The income inclusion value varies depending on the leased vehicle's initial fair market value and the year of the lease. The IRS recently released a table to help taxpayers set inflation-adjusted leasing inclusion values for vehicles leased from 2020.
For example, suppose your business leases a light truck with a fair market value of $ 66,500 on January 1, 2020, for three years. We assume that it is used for commercial purposes only. According to the IRS table, the income inclusion values for each rental year would be as follows:
$40 in 2020
$89 in 2021
$131 in 2022
The lease inclusion table is designed to balance the tax advantages of leasing a luxury car versus purchasing it and taking advantage of the significant tax incentives for first-year depreciation.
Contact a tax advisor to discuss the pros and cons of leasing and buying a utility vehicle. Taxes are only one consideration in this crucial decision.
Conclusion
The TCJA permanently extended Section 179 limits. But the first-year bonus depreciation program will begin to phase-out 20% per annum from fiscal years starting in 2023. And the bonus depreciation program will expire after 2026 unless Congress expands it.
Also, keep in mind that corporate tax rates and rules may not last. In the future, Congress could pass legislation that would change existing tax deductions and fees or even revoke the additional depreciation program and Section 179 deductions to cover the financial exemption from COVID-19 and other spending programs. Therefore, it is important to prepare for a variety of scenarios. It may be advantageous for some taxpayers to opt for additional depreciation and Sec. 179 for 2020 and instead claim lower depreciation deductions in the first year and deferred deductions for subsequent years when tax rates are likely to increase.
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