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Business use vehicles: potential new tax law impact

business use vehicles, depreciation, section 179 deduction, tax reformThe new tax law is drafted and should be voted on this week. How will it impact your business? Some of the potential modifications will enhance your ability to depreciate certain business assets, such as business use vehicles. Below are a couple of the major updates and how they would impact your business vehicles (please note that this technically is not signed into law yet as of 12/20/17). Please consult your tax advisor on how and when it may apply to you.

§179 expensing

  • Increases the maximum amount that could be deducted to $1,000,000 (up from $500,000).
  • The above limit is reduced dollar for dollar to the extent the total cost of §179 property placed in service during the year exceeds $2,500,000 (up from $2,000,000).
  • These changes would be for property placed in service in tax year beginning after 2017.
  • §179 expensing for a sports utility vehicle is $25,000 (unchanged), but will be indexed for inflation starting after 2017.
  • Certain non-personal use vehicles can fall outside of the luxury auto limitations (please consult your tax advisor).

Bonus depreciation

  • Increased to 100% (up from 50%) for property placed in service after September 27, 2017, and before 2023.
  • It would start to phase down in 2023 by 20% each year.
  • Property that is acquired prior to September 27, 2017, but placed in service after September 27, 2017 would remain subject to the rules available under the “old” current law.
  • Property eligible for bonus depreciation would now include “used property,” so long as the acquiring taxpayer had not previously used the acquired property, and if it is not acquired from a related party.
  • Property used in an electing “passive” real property activity or “electing farm” trade or business, or a business that has “floor plan financing indebtedness,” is not eligible for these new rules. Basically, any activity that is not subject to the new interest expense limitation rules. (Please consult your tax advisor.)

2018 Depreciation limits on luxury automobiles (6,000 GVW or less) and personal use property

  • If bonus depreciation is not claimed (or ineligible), allowable depreciation would be limited to:
    • $10,000 in year one
    • $16,000 in year two
    • $9,600 in year three
    • $5,760 in all subsequent years
  • Bonus depreciation would add an additional $8,000 to your first-year deduction, if applicable.
  • Limits apply to any passenger automobile that cost over $50,000 (previously $15,800).
  • The example above assumes 100% business use.

Section 179 expensing with 100% business use

Effective for tax years beginning:Old law2018
Dollar limit on expense deduction (subject to taxable income):500,0001,000,000
Phase-out starts dollar for dollar when total property placed in service exceeds:2,000,0002,500,000
Qualifying property:New or usedNew or used
Maximum deduction - car, truck or van - GVWR > 6,000 lbs & < 14,000 lbs25,00025,000
Vehicles - GVWR > 6,000 but not over 14,000 lbs (exception to the above limitations)No limitNo limit
  • Are designed to seat more than nine passengers behind the driver’s seat, or
  • Open cargo area or covered box that is at least six feet long (example, pick-up with full size 6-foot-bed), or
  • Vehicle that has fully enclosed driver compartment and load carry device, does not have seating behind the driver’s seat and does not protrude more than 30 inches ahead of windshield

Bonus depreciation on property with 100% business use

Placed in service date:Old law9/28/2017 to 12/31/20221/1/2018 to 12/31/2022
Bonus depreciation %:50%100%
Phase-outNo limitNo limit
Qualifying propertyNewNew or used
Maximum deduction - car, truck or van GVWR > 6,000 lbs & < 14,000 lbsNo limitNo limit
Maximum deduction - car, truck or van < 6,000 lbs GVWR (1st year)11,16018,000

Example 1: New SUV > 6,000 lbs GVWR used 100% business

Old lawNew law
Purchase price70,00070,000
Section 179 Deduction(25,000)(25,000)
Depreciable basis45,00045,000
Bonus depreciation %50%100%
Bonus depreciation deduction(22,500)(45,000)
Regular depreciation (assume 1/2-year convention at 20%)(4,500)0
Total Section 179 Deduction and depreciation(52,000)(70,000)

Example 2: Used SUV > 6,000 lbs GVWR used 100% business

Old lawNew law
Purchase price70,00070,000
Section 179 Deduction(25,000)(25,000)
Depreciable basis45,00045,000
Bonus depreciation %0%0%
Bonus depreciation deduction0(45,000)
Regular depreciation (assume 1/2-year convention @ 20%)(9,000)0
Total Section 179 deduction and depreciation(34,000)(70,000)

For illustrative purposes only. Please contact your tax advisor.

Jeremy Smith, CPA