As tax season approaches, knowing what you can and cannot put on your tax return in regard to business vehicles is an important topic. Please note: the following discussion assumes you are using the vehicle(s) for 100% business use, so reach out to a tax professional if you have a unique situation.
Depreciation is the value of an item lost over time and vehicles are especially susceptible to this. The IRS imposes limits on what can be claimed as depreciation. For passenger vehicles, you may have heard the term “luxury automobile depreciation limitation” which may seem a little confusing at first. Despite the name, this doesn’t apply to Mercedes Benz or BMW vehicles alone. The term “luxury” applies to all passenger vehicles; according to the IRS, this is all vehicles weighing less than 6,000 lbs.
The following table shows the maximum amount of depreciation that can be deducted on your 2021 tax return for passenger vehicles:
1st Tax Year of Ownership: $10,200
2nd Tax Year: $16,400
3rd Tax Year: $9,800
All years following: $5,860
Trucks, vans, and other large vehicles are not subject to depreciation limits and may also qualify for other deductions or bonus depreciation. But what do things like “bonus depreciation” and “Section 179” mean? Both terms describe an accelerated means of deducting depreciation on your return. IRS Section 179 allows business owners to deduct a dollar amount of new assets, whereas bonus depreciation allows you to deduct a percentage of the cost of a new asset.
While there are no limits on bonus depreciation for these larger vehicles, there are limits on Section 179. Unless the vehicle has a large (longer than 6’) cargo area or is designed to seat more than 9 passengers (such as cargo vans and passenger transport vans), you are limited to a $26,200 deduction. However, if you have an SUV that weighs more than 6,000 lbs., you can deduct 100% as bonus depreciation if you’d like.
ADKF’s group of tax professionals take pride in understanding these tax laws and helping our clients navigate through these somewhat confusing requirements. Our goal is to Help you maximize your deductions and make the process as smooth as possible.