Favorable depreciation rules for business use of “heavy” SUVs, pickups and vans were locked in by the Protecting Americans from Tax Hikes (PATH) Act of 2015. By taking advantage of these rules, you may be able to write off the entire business-use portion of a heavy vehicle’s cost in the first year. Here’s how it works.
The PATH Act extended 50% bonus depreciation for 2016 and 2017, thereby increasing the maximum first-year deduction for new (not used) vehicles with GVWRs of 6,000 pounds or less. Even so, the deductions for lighter vehicles are much less than those for heavy vehicles. Here are the maximum annual depreciation deductions for lighter vehicles used 100% for business. (Deductions for less-than-100% business use are proportionately reduced.)
New Cars Placed in Service in 2016
Used Cars Placed in Service in 2016
New Light Trucks and Vans Placed in Service in 2016
Used Light Trucks and Vans Placed in Service in 2016
Heavy Vehicle Depreciation Tax Breaks in a NutshellThe business portion of the cost of your heavy vehicle is first reduced by the Section 179 deduction. If the vehicle is classified as an SUV under the tax rules, the Sec. 179 deduction is limited to $25,000.
Heavy non-SUVs — such as long-bed pickups and vans — are unaffected by the $25,000 limit. For those vehicles, you can often write off the entire business-use portion of the cost in the first year under the Sec. 179 deduction privilege. Importantly, pickups with cargo beds that are at least six feet in interior length aren’t classified as SUVs. (Pickups with shorter beds are treated as SUVs, however.)
Second, you can claim the first-year 50% bonus depreciation deduction, which is allowed only for new (not used) vehicles. Finally, the business-use portion of the remaining cost (if any) is depreciated under the “regular” depreciation rules. In the first year, the regular depreciation rate is usually at 20% for vehicles.
Important note: The generous first-year depreciation deduction rules explained in this article are available only for vehicles used more than 50% for business.
Case in Point
Here are a couple of examples to show how these favorable tax breaks can add up.
First, suppose you buy a new $50,000 heavy SUV before year end. It’s used 100% in your sole proprietorship business. Because the vehicle is an SUV, the Sec. 179 deduction is limited to $25,000. So, the first-year depreciation would be a whopping $40,000, including the following elements:
1. $25,000 Sec. 179 deduction,
2. $12,500 bonus depreciation (half of the remaining purchase price after the Sec. 179 deduction), and
3. $2,500 regular depreciation (20% of the remaining purchase price after the above two deductions).
The first-year deduction of $40,000 will reduce both your federal income tax bill and your self-employment tax bill. In some (but not all) states, you also may be eligible for a generous state income tax deduction.
Alternatively, suppose you buy a new $50,000 sedan and use it 100% for business. With this smaller vehicle, your first-year depreciation write-off would be only $11,160. For a new $50,000 light truck or light van, your first-year write-off would be only $11,560.
What if you purchase a used vehicle instead of a new one? You can still claim the $25,000 Sec. 179 deduction, but you’re not eligible for bonus depreciation. Regular depreciation would be $5,000 (20% of the remaining $25,000 of the purchase price after the Sec. 179 deduction). In this case, your total first-year depreciation deduction would be $30,000.
Now, let’s suppose you buy a heavy pickup with a long bed for $50,000. This vehicle isn’t subject to the $25,000 Sec. 179 deduction limitation. For federal income tax purposes, you can generally deduct the entire cost of this vehicle on this year’s tax return under Sec. 179. Moreover, the pickup can be either new or used.
In contrast, if you buy a used $50,000 sedan, your first-year depreciation write-off would be only $3,160. For a used $50,000 light truck or light van, your first-year depreciation write-off would be only $3,560.
Examples of “Heavy” Vehicles
The Sec. 179 deduction and bonus depreciation deals are available only for an SUV, pickup or van with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds that’s purchased (not leased). Fortunately, quite a few vehicles qualify for the “heavy” SUV label, including:
- Buick Enclave,
- Cadillac Escalade,
- Chevy Tahoe,
- Dodge Durango, and
- Jeep Grand Cherokee.
Most full-size pickups — including Nissan Titans, Toyota Tundras and Dodge Rams — also qualify. A vehicle’s GVWR can usually be found on a label on the inside edge of the driver’s side door. The IRS has confirmed that heavy SUVs qualify for the aforementioned depreciation tax breaks whether they are built on a truck chassis or an auto chassis. So, heavy cross-over vehicles also qualify for this favorable tax treatment.
The favorable depreciation rules for heavy vehicles come with limits. Here are some common caveats you should be aware of:
1. The Sec. 179 deduction can’t exceed the taxpayer’s aggregate net business taxable income before the Sec. 179 write-off. If you operate your business as a sole proprietorship, or as a single-member LLC treated as a sole proprietorship for tax purposes, you can count any wages that you may earn as an employee as additional business income. If you’re married and file a joint return, you can also count your spouse’s earnings from employment as well as any self-employment income that he or she may earn.
2. Special rules apply if you operate your business as a partnership, multimember LLC or corporation. Consult your tax adviser about how to take full advantage of the depreciation breaks for heavy business vehicles in your situation.
3. In the five tax years following the year that you put your heavy vehicle into service, the business-use percentage must continue to exceed 50%. Otherwise, you run afoul of “recapture” rules that will force you to add back some previous depreciation write-offs into your taxable income. To fully cash in on the available depreciation breaks, you must commit to using the vehicle over 50% for business for the first six years.
4. For 2016, the maximum Sec. 179 deduction is $500,000, subject to a $2,010,000 phaseout threshold. These amounts are now permanent and subject to inflation indexing under the PATH Act.
Quick Action May Be Advisable
As things stand right now, the favorable business vehicle depreciation rules outlined in this article are “permanent” features of the Internal Revenue Code. But nothing is permanent when it comes to taxes. Depending on how the upcoming elections turn out, less favorable rules could apply in the future.
Additionally, under the PATH Act, bonus depreciation is scheduled to be reduced to 40% in 2018 and 30% in 2019 before it expires on December 31, 2019. So, it’s a limited time offer that will gradually decrease and expire, unless Congress takes further action.
For these reasons, it might make sense to buy your vehicle this year and place it in service before year end. That way, you can lock in the valuable first-year depreciation breaks. However, consult your tax adviser before signing the paperwork to make sure you’re not affected by the fine print in the tax code that can limit depreciation write-offs.