The question of whether a vehicle can be deducted in a trade or business often arises. There are specific limitations that can make the depreciation of a car or SUV take longer compared to other business assets.
Firstly, you have the option of either taking the standard business mileage deduction or actual expenses. If you use the standard mileage rate (67¢ per mile in 2024), the depreciation is already factored into the rate and so there are no limitations.
If instead, you use the actual expense method, you could potentially write off a large portion of the vehicle’s cost in the year it’s placed into service due to bonus depreciation (60% for 2024; 40% for 2025; 20% for 2026 and 0% for 2027+). For the remaining cost (or if you opt out of bonus depreciation), you would typically depreciate the vehicle over six years using the following accelerated MACRS percentages: Year 1, 20%; Year 2, 32%; Year 3, 19.2%; Years 4 and 5, 11.52%; and Year 6, 5.76%. Depreciation usually starts in the middle of Year 1 and ends in the middle of Year 6. Additionally, both bonus and regular depreciation amounts are reduced based on the vehicle’s non-business use. Cars used 50% or less for business are required to use straight-line depreciation instead of accelerated MACRS.
Passenger automobiles are subject to specific cost recovery limitations. Defined as four-wheeled vehicles with the primary use on public streets, roads and highways, with a gross vehicle weight of 6,000 lbs or less. The GVW is determined for cars based on their unloaded weight and light trucks and vans built on a truck chassis as fully loaded weight. The depreciation limitations, which are adjusted for inflation and typically change each year, cap the amount of depreciation you can claim. For vehicles first used in 2024, the depreciation limits are $20,400 for the first year, $19,800 for the second year, $11,900 for the third year, and $7,160 for subsequent years.
These limitations cannot be avoided by electing to expense the vehicle under Code Sec. 179, as any automobile expense election is subject to these depreciation limits.
From a business decision perspective, these limitations effectively increase the “after-tax” cost of vehicles used in your business. The actual cost of using regular equipment is the purchase price minus the tax benefits from depreciation deductions, including their time value. If these deductions are reduced or deferred, the tax benefits decrease, making the true cost higher. This should be considered when deciding how much to spend on vehicles for your business.
Given these restrictions on passenger vehicles, it might be more advantageous from a tax perspective to replace your business car with a heavy sport utility vehicle (SUV) instead. The annual depreciation and expensing caps for passenger cars do not apply to trucks or vans, including SUVs, that have a gross vehicle weight rating over 6,000 pounds. This means you can generally write off most of the cost of a new SUV used solely for business through bonus and regular depreciation in the year it is placed into service.
If you choose to use Section 179 expensing for an SUV, an inflation-adjusted limit applies ($30,500 for SUVs placed into service in 2024), separate from the general caps. An overall dollar limit for all assets expensed in the year also applies. Any remaining cost after the Section 179 expensing must be depreciated according to standard rules, without regard to the annual caps.
Note that lessees are not subject to these depreciation limitations. However, lessees of expensive vehicles must include specified amounts in their income each year as determined by IRS guidelines, which effectively reduces the deductions allowed for lease payments.
Disclaimer: The information provided here is for general informational purposes only and should not be construed as legal or financial advice. Always consult with a qualified tax professional or advisor to discuss your specific situation and obtain advice tailored to your individual needs. The accuracy, completeness, and timeliness of the information cannot be guaranteed, and you should rely on professional guidance when making tax-related decisions.