Resources

As tax laws evolve, the rules for deducting depreciation on vehicles used for business purposes have become more flexible yet remain complex. Understanding these rules is crucial for maximizing your tax benefits, especially with annual inflation adjustments influencing allowable depreciation deductions. Here’s an overview of how to navigate these rules for cars, SUVs, pickups, and vans used in your business.

Methods for Deducting Business Vehicle Expenses

When it comes to deducting business-related vehicle expenses, you have two primary methods to choose from:

1. Cents-per-Mile Method: For 2024, the standard mileage rate is 67 cents per business mile (an increase from 65.5 cents in 2023). This rate is intended to cover all vehicle expenses, including fuel, maintenance, repairs, tires, and insurance. A built-in depreciation allowance is also included in this rate.
2. Actual Expense Method: This method requires tracking all vehicle-related costs based on actual expenses paid. Depreciation, a non-cash expense, necessitates specific calculations under tax rules. Typically, the actual expense method results in higher deductions than the cents-per-mile method, especially when depreciation is factored in. The rules for calculating depreciation depend on the type of vehicle you use in your business.

Depreciating Passenger Autos

For passenger vehicles used more than 50% for business, annual depreciation calculations are required until the vehicle is fully depreciated. Passenger autos are defined as vehicles intended for public road use with a gross vehicle weight rating (GVWR) of 6,000 pounds or less, encompassing many cars, SUVs, and pickups.

Under general rules, you can depreciate the business-use portion of a passenger auto’s cost over six years. However, for more expensive vehicles, annual depreciation deductions are capped under the “luxury” auto depreciation limits. If you claim first-year bonus depreciation, the first-year limit is increased by $8,000, applicable to both new and used vehicles that are new to you.

For 2024, the maximum luxury auto depreciation deductions are as follows:

• Year 1: $20,400 (with bonus depreciation) or $12,400 (without bonus depreciation)
• Year 2: $19,800
• Year 3: $11,900
• Year 4 and beyond $7,160 until fully depreciated

Luxury auto depreciation limits generally apply to vehicles costing $70,000 or more if bonus depreciation is claimed. Without bonus depreciation, the limit applies to vehicles costing $62,000 or more. These limits are proportionately reduced based on non-business use.

For less expensive vehicles used over 50% for business, depreciation is spread over six years:

• Year 1: 20% of the business-use portion
• Year 2: 32%
• Year 3: 19.2%
• Year 4: 11.52%
• Year 5: 11.52%
• Year 6: 5.76%

Depreciating Heavy Vehicles

Heavier vehicles, such as certain SUVs, pickups, and vans (those with a GVWR above 6,000 pounds), benefit from more favorable depreciation rules. These vehicles, classified as transportation equipment for tax purposes, can often be fully depreciated in the first year of service under Section 179.

For 2024, the maximum Sec. 179 deduction is $1.22 million, with a limit of $30,500 for heavy SUVs. However, vehicles that do not fall under the SUV classification, such as shuttle vans and full-size pickups, may qualify for the full Sec. 179 deduction.

Additionally, these vehicles are eligible for bonus depreciation, which has decreased to 60% for those placed in service in 2024 (down from 80% in 2023). It’s advisable to utilize as much of the Sec. 179 deduction as possible and then apply bonus depreciation to the remaining cost.

First-Year Depreciation under the TCJA

The Tax Cuts and Jobs Act (TCJA) introduced permanent enhancements to Sec. 179 and temporarily expanded first-year bonus depreciation. For 2024, the maximum Sec. 179 deduction is $1.22 million, with a phaseout threshold of $3.05 million. Bonus depreciation is currently set at 60% for vehicles placed in service in 2024.

Final Thoughts

Navigating the rules for vehicle depreciation can be challenging, but understanding these guidelines is key to optimizing your deductions. For personalized advice on how to apply these rules to your specific situation, please contact us at info@millermusmar.cpa or call us at +1-703-437-8877.