Don’t forget to depreciate business vehicles

Your Guide to State, Local, Federal, Estate + International Taxation

Changes in tax law implemented in 2018 means businesses have been able to take advantage of depreciation laws regarding their ability to depreciate business vehicles. Here are a few things to keep in mind when figuring out the depreciation.

Section 179 is an immediate expense deduction that business owners can take instead of depreciating the asset over a period of time. It is limited to taxable income from the actively conducted trade or business but amounts in excess of the taxable income can be carried forward. For tax year 2021, the limit for Section 179 has increased to $1,050,000 for vehicles, equipment and software. The full $1,050,000 can be claimed up to the $2,620,000 equipment purchases limit. Once that number has been reached, the Section 179 deduction decreases dollar-for-dollar and reaches zero once $3,670,000 worth of equipment is purchased or financed. Section 179 expensing for a sport utility vehicle is $26,200 for tax year 2021. An SUV that your business uses must exceed 50% of its total use in order to be eligible.

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Bonus depreciation remains at 100% until January 1, 2023. It will start to phase down in 2023 by 20% each year until 2027. Some reminders for bonus depreciation, property eligible for bonus depreciation includes “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. The taxable income limitations applicable to the Section 179 deduction do not apply to bonus depreciation.

If bonus depreciation is not claimed (or ineligible), allowable depreciation would be limited to:

  • $10,200 in year one
  • $16,400 in year two
  • $9,800 in year three
  • $5,860 in all subsequent years

Bonus depreciation would add an additional $8,000 to your first-year deduction, if applicable.

This can be confusing. If you have any questions on how to depreciate business vehicles, please contact your Henry+Horne advisor

Laine Sperbeck