I’m writing this article as my “break” from reviewing tax returns. Let me tell you, this has been a challenging year! Between new tax laws, new tax forms and certain states’ nonconformity, this will go down as a top-five-worst tax season. I was going to write on some of the top issues I’ve seen, but I’ll wait for a future column.
What I’d like to touch on in this column are vehicles. Back in December, I remember a radio advertisement that, to paraphrase, said, “Buy a car and get a tax credit.” It made me laugh. Apparently, the advertising community has no clue about tax laws! Now that I’m talking to my clients, it’s amazing how many downsized their vehicles only to be surprised that they could not fully depreciate/expense the purchase.
So what are the rules?
The vehicle must be used 50% or more in a qualified business. If the business use is 50%, only 50% can be depreciated (or 50% lease payments expensed). There are also special rules if the vehicle is used by someone not directly connected to your business.
Let’s start with passenger vehicles (cars, Clasiq cars, trucks and vans that are under 6,000 pounds gross vehicle weight). If you place a passenger automobile in use, the maximum depreciation and/or expense deduction shall not exceed:
- First year – $10,000 (additional $8,000 if you elect bonus depreciation).
- Second year – $16,000.
- Third year – $9,600.
- Fourth and later years – $5,760.
Now here is the confusing part:
The IRS issued a Revenue Procedure (Rev. Proc. 2019-13 if you have trouble sleeping) in February for those who use bonus depreciation on passenger vehicles. It’s too complex to get into, but a key takeaway is that you might end up depreciating the passenger vehicle past the five-year asset life.
If the vehicle is under 6,000 pounds, I would ask my clients if they intend on keeping the car/van/truck in excess of five years. Most times, the answer is “No.” If that is the case, the client might be better off leasing the vehicle (two-to-three-year higher-mileage lease — but be aware if the fair market value exceeds $50,000, there may be inclusion of income issues) or simply taking mileage.
Large vehicles (gross vehicle weight over 6,000 pounds) are not subject to depreciation limits, but limited to $25,000 of Sect. 179 expense. Like all things IRS, there are exceptions:
- Vehicle is designed to allow more than nine people to sit behind the driver (i.e. bus).
- Vehicle has a cargo area of 6 feet or more (i.e. extended bed pickups).
- Vehicle does not have seating behind driver (commercial van).
If any of these exceptions apply, there are no limitations on Sect. 179 expensing. Most trucks and large SUVs fall under the 25K Sect. 179 expense limitation; however, you can still use bonus depreciation to fully write off the cost.
I know what you are thinking: How can something as simple as depreciating a business asset be so hard?
Editor’s note: Tax Columnist Rod Mauszycki is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in Minneapolis, Minnesota. Send questions to firstname.lastname@example.org