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December 27, 2021 | Kristine A. Tidgren
We frequently receive questions about depreciating and expensing business vehicles. This post provides a brief summary of the general rules for 2021.
Vehicles that are 6,000 Pounds or Less
IRC §280F(a) imposes dollar limitations on the depreciation and IRC § 179 expensing deductions that can be taken for passenger automobiles. This limitation is often referred to as the “luxury automobile depreciation limitation,” even though it applies to vehicles not commonly considered “luxury automobiles.” Passenger automobiles, by definition, weigh 6,000 pounds gross vehicle weight or less.
The limits of the depreciation deduction (including section 179 expense deductions) for luxury automobiles placed in service in 2021 for which bonus depreciation is not taken are as follows:
1st Tax Year $ 10,200
2nd Tax Year $ 16,400
3rd Tax Year $ 9,800
Each Succeeding Year $ 5,860
For new or used passenger automobiles eligible for bonus depreciation in 2021, the first-year limitation is increased by an additional $8,000, to $18,200.
Taxpayers who purchase a passenger automobile subject to the IRC § 280F limitations must consider the impact of taking bonus depreciation on future depreciation deductions. Rev. Proc. 2019-13 provides a safe harbor that allows for a yearly deduction.
Larger Vehicles
SUVs with a gross vehicle weight rating above 6,000 lbs. are not subject to depreciation (including bonus depreciation) limits. They are, however, limited to a $26,200 section 179 deduction in 2021. IRC § 179(b)(5)(A). No depreciation or §179 limits apply to SUVs with a GVW more than 14,000 lbs. Trucks and vans with a GVW rating above 6,000 lbs. but not more than 14,000 lbs. generally have the same rules: no bonus depreciation limitation, but a $26,200 section 179 deduction limit. These vehicles, however, are not subject to the section 179 limit if any of the following exceptions apply:
- The vehicle is designed to have a seating capacity of more than nine persons behind the driver's seat;
- The vehicle is equipped with a cargo area at least 6 feet in interior length that is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment; or
- The vehicle has an integral enclosure, fully enclosing the driver compartment and load-carrying device, does not have seating behind the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.
Although SUVs are subject to the $26,200 section 179 limit in 2021, they are eligible for 100% bonus depreciation if they are above 6,000 lbs. 100 percent bonus is available through the end of 2022. After that, it is scheduled to drop to 80 percent in 2023.
Business Use and Recapture Danger
It should be noted that the above discussion assumes 100 percent business use. If vehicle use drops below 100 percent, the dollar limits are proportionately reduced.
It is also important to realize that passenger automobiles and most other vehicles are “listed property” for which special rules apply. If the vehicle is not used more than 50 percent for business purposes, no section 179 or bonus depreciation deduction is allowed. Only straight-line depreciation can be taken. If a taxpayer’s business use drops to 50 percent or less at any time after bonus, section 179, or MACRS depreciation has been taken, the depreciation or expensing deductions in excess of straight-line will be subject to recapture. This amount will be taxed as ordinary income, subject to self-employment tax.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.
