The Tax Cuts and Jobs Act (TCJA) has plenty of good news for small businesses and their owners, including super-favorable first-year depreciation breaks for vehicles used for business. These breaks have not gotten much attention. But if you read this, you’ll know what you need to know.
Bigger depreciation allowances for passenger vehicles
For both new and used passenger vehicles that are acquired and placed in service after 12/31/17 and used over 50% for business, the TCJA 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 deprecation (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. These allowances will be indexed for inflation for 2019 and beyond.
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 TCJA increases the maximum first-year luxury auto depreciation allowance by $8,000 (from $10,000 to $18,000 for 2018). However, 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 bump for bonus depreciation is scheduled to disappear after 2026, unless Congress takes further action. Under prior law, used vehicles were ineligible for first-year bonus depreciation.
Prior-law allowances for passenger vehicles were skimpier
For 2017, the prior-law allowances for passenger vehicles were $11,160 for Year 1 for a new car with additional first-year bonus depreciation or $3,160 for a used car, $5,100 for Year 2, $3,050 for Year 3, and $1,875 for Year 4 and thereafter. Slightly higher limits applied to light trucks and light vans. So the TCJA allowances are a big improvement.
100% first-year bonus depreciation is allowed for heavy SUVs, pickups, and vans used over 50% for business
The TCJA 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. However, a used asset 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.
However, you must use a heavy vehicle over 50% for business for 100% first-year bonus depreciation to be available. 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 Audi Q7, Buick Enclave, Chevy Tahoe, Ford Explorer, Jeep Grand Cherokee, Toyota Sequoia, and lots of full-size pickups.
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 where the door hinges meet the frame. Don’t expect dealer sales personnel to know which vehicles have GVWRs above 6,000 pounds. Check for yourself.
In 2018, you buy a new $60,000 heavy SUV and use it 100% in your business. You can deduct the entire $55,000 in 2018 thanks to the new 100% first-year bonus depreciation break. If you only use the vehicle 60% for business, your first-year bonus depreciation deduction is $36,000 (60% x $60,000)
If you instead buy a used $45,000 heavy SUV, pickup, or van, you can still deduct the entire cost in 2018 thanks to the 100% first-year bonus depreciation break — which is allowed for both new and used vehicles. If you only use the vehicle 60% for business, your first-year bonus depreciation deduction is $27,000 (60% x $45,000).
TCJA eliminates employee deductions for unreimbursed vehicle expenses
Now for the only bad news. Some companies require employees to use their own vehicles for business-related travel. Under prior law, you could claim an itemized deduction for your total unreimbursed business-usage vehicle expenses, subject to a 2%-of-adjusted-gross-income (AGI) threshold for writing off miscellaneous itemized expenses.
For 2018-2025, the new law eliminates write-offs for miscellaneous itemized expenses that were subject to the 2%-of-AGI deduction threshold under prior law. So for 2018-2025, an employee can no longer claim deductions for unreimbursed business-usage vehicle expenses. If this unfavorable change affects you, try to either negotiate a salary adjustment to compensate for the loss of the deduction or persuade your employer to provide tax-free reimbursements for the business percentage of your vehicle expenses.
The Bottom Line
The TCJA dramatically increases first-year depreciation deductions for vehicles used more than 50% for business, and this fact has been well-publicized. But now you know.