Are you thinking about buying an additional vehicle for your business or trading in an existing vehicle for a new or used one? Vehicles are subject to rules regarding depreciation and trade-ins. It’s best to know the rules before you make a decision on what model to buy and whether to trade or sell the existing vehicle. Depreciation rules within the Tax Code as it applies to vehicles can be very restrictive depending on the type of vehicle, so the choice you make can make a significant difference for income tax purposes.
This article can help you to make a decision that maximizes the first year depreciation deduction for Federal income tax purposes and applies to vehicles which are used more than 50% for qualified business purposes and which are either purchased or financed with certain leases and loans.
The most restrictive depreciation rules apply to used “passenger vehicles”, and the least restrictive generally apply to full size pickup trucks, large capacity commuter vans, cargo vans and certain similar specialized vehicles or vehicles with a gross vehicle weight rating more than 14,000 lbs.
The first year depreciation for a typical “used” passenger vehicle is generally limited to less than $4,000, but if the passenger vehicle is “new” versus “used” bonus depreciation for 2016 increases the first year depreciation to just over $11,000. Following that first year, depreciation is limited for each subsequent year and it can take many years to depreciate an expensive luxury passenger vehicle in this category. Additionally Section 179, which allows first year expensing, is not available to this class of vehicles.
Generally pick-ups with a cargo bed under six feet in length, passenger vans and SUVs that have a gross vehicle weight rating greater than 6,000 lbs., also have restrictions on depreciation and bonus deprecation allowed on “new” vehicles as described above, although the amount of depreciation allowed is slightly higher. These vehicles however may qualify for first year expensing (Section 179) for up to $25,000 which is an added bonus of buying a vehicle in this class.
The least restrictive, or most accelerated depreciation applies to full sized pickup trucks are trucks that have a gross vehicle weight over 6,000 and a bed length of 6 feet or longer. These, along with trucks with a gross vehicle weight of 14,000 lbs. or more, are not limited by the amount of Section 179 depreciation and can provide the most accelerated depreciation. Vehicles with a fully enclosed cargo area with no seating behind the driver’s seat generally fall in this category as well. Many extended cab pickup trucks may have a bed less than 6 feet in length which would disqualify them from this class of vehicles.
While first year expensing (Section 179), may be available for the last two classes of vehicles, it may not be taken to create an overall loss for income tax purposes. Tax rules for trade-ins can also impact the results, so it is important to know the depreciated value of your vehicle before deciding to trade or sell it. The tax rules on depreciation can feel like a moving target as they change frequently with legislation. This article was meant to give a general overview and does not cover all scenarios or rules as they may apply. The rules are complex, so what may seem insignificant can make a big difference to your tax liability which is why it is important to consult your tax advisor before you make a vehicle purchase.
Written by: Corinne Wooden