What Do I Need to Know About Purchasing, Deducting, and Depreciating a Business Vehicle?

As we lead up to year-end we have had a lot of clients ask about business vehicle purchases so of course we are writing a blog about it! In this article we are going to be talking about some year-end things to think about but also discussing vehicle purchases in general.

Thanks the the Tax Cuts and Jobs Act (“Trump Tax Cuts”) you can write off the cost of a vehicle faster than ever before, many times up to 100% in the first year.

When it comes to year-end purchases there are two main things you need to remember. If you want to get a vehicle deduction you need to:

1. Own the vehicle, and
2. Place it in service on or before December 31. “Place in Service” means drive at least 1 mile.

What Options are Available for Vehicle Deductions? 

Mileage Deduction or Actual Expenses

• Mileage Deduction
  • This one is pretty straight forward. Get a certain amount of money per mile driven. Here is the mileage deduction rates for 2020:
    • Business: 57.5 Cents per Mile
    • Charity: 14 Cents per Mile
    • Medical and Moving: 17 Cents per Mile
    • Personal or Commuting: None
  • Note: For the business side, if you use your vehicle for business less than 50% of the time, you MUST use the mileage deduction.
• Actual Expenses
  • For this option you take the business use (business miles divided by total miles) and multiple that by the total actual expenses for the vehicle. These can include: loan interest (if owned), depreciation (if owned), lease payment, fuel, registrations, car washing, repairs and maintenance, insurance, etc.
  • This method complicates things slightly and is where depreciation comes into play. We will be talking about depreciation for the rest of this blog.
  • Note: If you use the actual expense method you cannot also use mileage deduction. It is one or the other.

What Do I Need To Know About Vehicle Depreciation?

Depreciation is how you get the expense for the actual cost of the vehicle.

• GVWR Matters – But what is GVWR? It stands for Gross Vehicle Weight Rating and the big thing to know here is whether it is over or under 6,000. Here are some example vehicles and their GVWR:
  • Trucks: 2020 Ford F-150 (6,100 to 7,050) — 2021 GMC Sierra 1500 (6,800 to 7,100)
  • SUV:  2020 Ford Explorer (6,160) — 2020 GMC Terrain (4,464 to 4,630) — 2020 GMC Acadia (6,001)
  • These are just examples so be sure to double check the vehicle you are purchasing and what its GVWR is. The GVWR will decide which depreciation options are available for you.
• Bonus Depreciation
  • 100% Bonus Depreciation Available in Year 1 if GVWR of 6,001 or more.
  • GVWR of 6,000 or less, $8,000 in Year 1
• Section 179 Expensing
  • Maximum of $1,020,000
    • Limit: $25,500 for heavy SUV’s and other vehicles
  • The total amount you can deduct under Section 179 cannot be more than taxable income of the business.
• MACRS 5 Year Depreciation Table
  • Year 1: 20%
  • Year 2: 32%
  • Year 3: 19.2%
  • Year 4 and 5: 11.52%
  • Year 6: 5.76%
• Luxury Passenger Vehicle Depreciation Limits:
  • Year 1: $10,100
  • Year 2: $16,100
  • Year 3: $9,700
  • Year 4, and each year thereafter: $5,760
• Now all of that can all be a bit confusing so lets go through some scenarios to discuss how the depreciation would work.

How Do I Depreciate a New or Used SUV, Van or Pickup Truck With GVWR of 6,001 Pounds or More?

The important thing to understand here is a GVWR of 6,001 pounds or more. 

• Here are the depreciation options available to you:
  • The ability to elect bonus depreciation of 100 percent in year 1
  • The ability to select Section 179 expensing
    • SUV, Crossover Vehicle or Van: Up to $25,900
    • Pickup, Cargo Van or Passenger Van: Up to $1,040,000
      • Note: A pickup must have bed of at least six feet, otherwise it would fall under the SUV 179 limit. A cargo van would also qualify under SUV 179 limit unless it has a fully enclosed driver compartment and load-carrying area and no seats behind the drivers seat. A passenger van would fall under the SUV 179 limit if it seats nine people or less behind the driver’s seat.
  • MACRS depreciation using the five-year table
  • No luxury limits on vehicle depreciation deductions.
• Example: You buy and put in service before year-end a qualifying used SUV with a GVWR over 6,000 pounds for $50,000. Assuming it is 100% business use you can take a maximum deduction of $50,000 for the year using bonus deprecation.
  • If you did not want 100% bonus depreciation you can elect out, take $25,900 in Section 179 and then depreciate the remaining using MACRS over 5 years.

How Do I Deduct a New or Used Car or Vehicle With a GVWR of 6,000 Pounds or Less?

The important thing to understand here is basically any vehicle type with a GVWR of 6,000 pounds or less. 

• Here are the depreciation options available to you:
  • Claim up to $8,000 Bonus Depreciation in Year 1
  • Then depreciation with the follow maximums per year:
    
    • Year 1: $10,100 ($18,100 if you factor in the $8k bonus depreciation)
    • Year 2: $16,100
    • Year 3: $9,700
    • Year 4, and each year thereafter: $5,760
• Example: You buy and put in service before year-end a used SUV with a GVWR of 6,000 pounds or less for $65,000. Assuming it is 100% business use you can take $8,000 in bonus depreciation in year 1 and then an additional $10,100 for a total of $18,100.

Vehicle Depreciation Key Points and Take-Aways

Key things to consider and summary

• Keep a mileage log to prove the business use. Even if it is a 100% business use vehicle you should keep a mileage log to backup the business purpose.
• Vehicle must be in business name. If it is not, then use the accountable plan to reimburse yourself.
• If business use is less than 50% you must use the mileage method.
• If business use is 50% or more you can use the mileage or actual method.
• If your new or used vehicle has a GVWR of more than 6,000 pounds then you write off 100% of your business cost with bonus depreciation as long as you buy it and place in service before year-end.
• If your new or used vehicle has a GVWR or 6,000 pounds or less, then with a purchase price of $58,100 or more, you can write off up to $18,100 in 2020 if you buy it and place in service before year-end.

Remember, once the calendar rolls over to 2021 the majority of tax planning opportunities get tossed out the window. You have time now, take a couple hours to strategize and implement so you can ensure when you file your tax return you are paying the lease amount in taxes as legally possible!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.