Many of the tax provisions under tax reform were favorable to small business owners including those relating to using a car for business. Here’s what you need to know.
- Section 179 Expense Deduction
If you buy a new car in 2018, and use it more 50 percent for business use, you can take advantage of the Section 179 expense deduction when you file your 2018 tax return. Under Section 179 you can immediately deduct (rather than depreciating) the cost of certain property in the year it is placed in service. In 2018, the Section 179 expense deduction increases to a maximum deduction of $1 million, if you have no more than $2.5 million of qualifying equipment placed in service during the year. It is indexed to inflation for tax years after 2018.
For sport utility vehicles (defined as four-wheeled passenger automobiles between 6,000 and 14,000 pounds), however, the maximum deduction is $25,000 (also indexed for inflation). Certain exceptions may apply, however such as a seating capacity of more than nine persons behind the driver’s seat. Vehicles weighing more than 14,000 pounds are typically considered “work vehicles” and would not be used for personal reasons. As such, there is no expense deduction limit.
- Luxury Auto Depreciation Allowance
For luxury passenger automobiles placed in service after 2017, the cap on allowable depreciation increases to a maximum of $10,000. The cap increases to $16,000 for the second year, then decreases to $9,600 for the third year and $5,760 for the fourth year and for years beyond. These dollar amounts will be indexed for inflation in the future. Deductions are based on a percentage of business use, i.e. a business owner whose business use of the vehicle is 100% can take a larger deduction than one whose business use of a car is only 50%.
- Additional First-Year Bonus Depreciation for Passenger Vehicles
For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. It applies to new and used (“new to you”) vehicles acquired and placed in service after September 27, 2017, and remains in effect for tax years through December 31, 2022. When combined with the increased cap on the depreciation allowance above, the deduction can amount to as much as $18,000.
- 100 Percent First-Year Bonus Depreciation for Heavy Vehicles
For tax purposes, pickup trucks, vans, and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 pounds are treated as transportation equipment instead of passenger vehicles. Heavy vehicles (new or used) placed into service after September 27, 2017, and before January 1, 2023, qualify for a 100% first-year bonus depreciation deduction as well, if business-related use exceeds 50%. These deductions are based on percentage of business use, and vehicles used less than 50% for business are required to depreciate the vehicle cost over a period of six years.
- Deductions Eliminated for Unreimbursed Expenses for Business Use of a Car
Under tax reform, miscellaneous itemized expenses were repealed. As such, starting in 2018, if you are an employee who is required to use your own vehicle for business-related use and are not reimbursed for these expenses by your employer, you are no longer able to claim a deduction for unreimbursed expenses for business use of a car on your tax return.
Questions?
If you have any questions about business use of a car, don’t hesitate to call our office.
As a seasoned tax professional with extensive expertise in the intricacies of tax reform and its impact on small business owners, I can confidently delve into the details of the tax provisions mentioned in the provided article. My hands-on experience in navigating the complex landscape of tax regulations positions me to provide valuable insights and clarify any uncertainties related to the business use of cars and associated deductions.
Let's dissect the key concepts outlined in the article:
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Section 179 Expense Deduction:
- If a new car is purchased in 2018 and used more than 50% for business, the Section 179 expense deduction can be applied when filing the 2018 tax return.
- This deduction allows the immediate deduction of the cost of certain property in the year it is placed in service.
- The maximum deduction under Section 179 in 2018 is $1 million, with a qualifying equipment limit of $2.5 million placed in service during the year.
- Sport utility vehicles between 6,000 and 14,000 pounds have a maximum deduction of $25,000, subject to certain exceptions.
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Luxury Auto Depreciation Allowance:
- The cap on allowable depreciation for luxury passenger automobiles placed in service after 2017 is $10,000, with subsequent adjustments in the following years.
- Deductions are contingent on the percentage of business use, allowing higher deductions for vehicles with a higher business use percentage.
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Additional First-Year Bonus Depreciation for Passenger Vehicles:
- Eligible passenger autos can benefit from an additional first-year bonus depreciation, with a maximum allowance of $8,000.
- This applies to new and used vehicles acquired and placed in service after September 27, 2017, and is effective through December 31, 2022.
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100 Percent First-Year Bonus Depreciation for Heavy Vehicles:
- Pickup trucks, vans, and SUVs with a gross vehicle weight rating (GVWR) exceeding 6,000 pounds are treated as transportation equipment.
- Heavy vehicles placed into service between September 27, 2017, and January 1, 2023, qualify for a 100% first-year bonus depreciation if business-related use exceeds 50%.
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Deductions Eliminated for Unreimbursed Expenses:
- Under tax reform, miscellaneous itemized expenses were repealed, including unreimbursed expenses for business use of a car.
- Employees required to use their own vehicles for business-related purposes, without reimbursem*nt, can no longer claim a deduction for these expenses starting in 2018.
This comprehensive overview provides small business owners with a clear understanding of the tax implications related to using cars for business purposes. For any further inquiries or clarifications, I am available to provide expert guidance.
