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Do You Use Your car for your Small Business? The New Tax Law is Good News for You!

by
Sherri Hastings
on
3/13/2018
Do You Use Your car for your Small Business? The New Tax Law is Good News for You!

The much-heralded changes in the tax laws mean something to almost every American citizen, and among those who will see the most benefit are the owners of small businesses, who will see new rules on first-year vehicle depreciation. These advantages have not gotten the same amount of publicity as some of the other items included in the Tax Cuts and Jobs Act (TCJA), but that doesn’t mean they are insignificant.

Passenger Vehicles Now Have Larger Depreciation Allowance 

Passenger vehicles that are used over half the time for business will now have larger depreciation allowances than in the past. The luxury auto depreciation allowance will apply to both new and used passenger vehicles placed in service for business use as of January 1, 2018, and the change has been deemed permanent. Under the new law, the maximum allowances for the first year will be $10,000. However, first-year bonus depreciation is available if the vehicle is placed in service between 9/28/17 and 12/31/26, raising the total by $8,000 to $18,000.

The allowance changes introduced under the TCJA represent a significant improvement for small businesses. Where before there were slightly higher limits available for light trucks and light vans, the same was not true of passenger vehicles. Previously, the allowances for passenger vehicles was $11,160 for a new vehicle or only $3,160 for a used vehicle. In order to qualify, a used vehicle can’t already have been used by the business. Allowing used vehicles to be included for first-year bonus depreciation represents a big change. It is specifically temporary and set to expire after 2026. 

The depreciation available for a vehicle’s second year in service is $16,000 (previously $5,100), $9,600 for the third year (previously $3,050) and $58,760 for the fourth year and every year thereafter (previously 1,875) until full depreciation is achieved.  Proportional inflation indexed allowances are provided for vehicles that are not used exclusively for business.

Depreciation Benefit Goes Beyond Passenger Vehicles 

In addition to the passenger vehicle allowances, businesses owning heavy SUVs, pick-up trucks and vans are able to take 100% first-year bonus depreciation as long as those vehicles were purchased and put in service between 9/28/17 and 12/31/22 and are used over half the time for business purposes. The previous first-year depreciation was only 50% and did not apply to used vehicles. This is true no matter whether they are new or used. As long as the vehicle was not previously used by the owner or the business entity, the depreciation is available.

The difference between the way that the law treats passenger vehicles and heavier vehicles is important to understand because it can have a significant financial impact. Because heavier vehicles such as vans, pickups, and SUVs that are used for over half business purposes are considered transportation equipment rather than vehicles, they are eligible for a 100% bonus depreciation. Heavy vehicles that are used half the time or less for business must be depreciated over six years.

Qualifying as a Heavy Vehicle 

To ensure that you get the 100% first-year bonus depreciation benefit offered for heavy vehicles, make sure that your pick-up, van or SUV meets the minimum manufacturer gross vehicle weight rating (GVWR) of over 6,000 pounds. This information is available on the inside of the driver’s side door panel, on the manufacturer label. Vehicles that are known to qualify include many full-size pickup trucks as well as SUVs such as the Chevy Tahoe, Jeep Grand Cherokee, Toyota Sequoia and the Audi Q7. 

Understanding How to Calculate Vehicle Depreciation

To get a sense of how the vehicle depreciation for heavy vehicles works, consider the following example. Zach purchases a Chevy Tahoe for $60,000 and uses it exclusively for business purposes. The entire purchase price is eligible for the first-year bonus depreciation. If, however, he only uses it for the business 60% of the time, his first-year bonus depreciation deduction would be limited to 60% of his $60,000 purchase price, or $36,000. For a used vehicle, the entire cost would also be completely deductible if it is used exclusively for business purposes, and the deduction would be proportionately reduced if the vehicle is used less than 100% of the time but more than 50% of the time.

Employee Deductions for Unreimbursed Vehicle Expenses Eliminated

Though the new tax law is largely good news for small business owners, there is some bad news for their employees who use their personal vehicles for business. Where these workers were previously allowed to claim itemized deductions for any business usage vehicle expenses for which they were not reimbursed, those write-offs have been eliminated under the new law. Previously miscellaneous itemized expenses above 2% of Adjusted Gross Income could be deducted, but between 2018 and 2025 that benefit is gone. It is suggested that employees that will be unfavorably impacted by this change discuss the possibility of either a salary adjustment with their employers or being compensated for their business-related vehicle expenses.

Tim Murphy, CPA writes for TaxBuzz, a tax news and advice website. Reach his office at [email protected].

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Sherri Hastings

Sherri Hastings

Tim Murphy is the managing member at Murphy & Murphy, CPA, LLC, a full-service certified public accounting firm, with emphasis on tax preparation, audits of governmental, educational, and non-profit entities, retirement planning, estate planning, business valuations, litigation support, and banking. He is a Certified Public Accountant in Maryland and Virginia. Tim is also a CERTIFIED FINANCIAL PLANNER professional, Personal Financial Specialist, Accredited Estate Planner, Certified Valuation Analyst, and Investment Adviser Representative.

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