a. Compact car made in the USA
b. Plug-in electric sedan
c. Hybrid passenger auto
d. Large sport utility vehicle (SUV)
While a compact car, an electric vehicle or a hybrid may save you money in gas and provide some nice tax breaks, a suitably heavy SUV, pickup, or van is potentially eligible for higher tax savings with 100% first-year bonus depreciation. That’s because heavy SUVs, pickups and vans, which are used more than 50% for business, are treated for federal income tax purposes as transportation equipment.
Specifically, 100% first-year bonus depreciation is allowed for the business-use portion of the cost of a heavy SUV, pickup, or van that is used over 50% for business. Heavy means the vehicle has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. Numerous popular SUV, pickup and van models pass this test. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame.
The federal income tax rules for depreciating vehicles used for business are complicated. Different rules apply to different categories of vehicles. Specifically, you must depreciate vehicles that are classified as passenger autos over several years, subject to annual depreciation maximums. Relatively unfavorable rules apply to vehicles that are used 50% or less for business. As a result of these limitations, depreciating an expensive vehicle that’s not a heavy SUV, pickup, or van, or a vehicle that’s not used over 50% for business, may take longer than you’d expect.
That’s why writing off the entire business-use portion of the cost of a vehicle in the first year is so valuable.
Now, let’s look at some basics about business vehicle depreciation deductions.
Depreciation calculations only come into play if you choose to use the actual expense method to calculate your allowable business vehicle deductions. If you choose to use the alternative standard mileage rate — which is 58.5 cents per business mile for 2022 — a depreciation allowance is built into the rate. In fact, the standard mileage rate is meant to cover all business vehicle expenses, including gas, oil, maintenance, repairs, tires and insurance. However, even if you use that standard mileage rate, you can deduct actual expenses for business-related parking fees and tolls.
In most cases from a financial standpoint, you’re better off using the actual expense method. If you choose the actual expense method, depreciation deductions are calculated depending on whether the vehicle is:
If you’re considering buying a vehicle for business, placing it in service before December 31, 2022, could deliver a significant write-off on this year’s federal income tax return. To measure the true cost of a business asset, you need to factor in the tax savings from depreciation deductions. If depreciation deductions are stretched out — as they are under the luxury auto depreciation limits — the value of the related tax savings is lower due to the “time-value-of-money” factor. So, the after-tax cost of the vehicle is that much higher.
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Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.