On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
Standard Mileage Rate Method: The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance and depreciation (or lease) expenses. The rate varies from year to year and for 2017, the standard mileage rate is 53.4 cents per mile (down from 54.0 in 2016). In addition, the cost of business-related parking and tolls is deductible.
Caution: If you don’t use the standard mileage rate in the first year the vehicle is placed in service, you cannot use it in future years for that vehicle. If, in a subsequent year, you switch to the actual method, you must use the straight-line method for depreciation. If the car is leased, you must continue to use the standard mileage rate in future years.
Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible. Both methods can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions. Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.”
The depreciation deduction for luxury vehicles has an annual limit, which is $3,160 for 2016 and if bonus depreciation is elected, the first year luxury vehicle limit will be $11,160. The first-year limit is $400 more for vans and trucks purchased in 2016. At the time this article was updated (1/17) the IRS had not yet released the 2017 rate.
In an effort to rein in the practice of purchasing SUVs as a tax shelter, Congress has placed a limit of $25,000 on the §179 deduction for certain vehicles. The limit applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver’s seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.
The following is a representative example of a heavy SUV write-off (assuming 100% business use) using the maximum Sec 179 exclusion.
Heavy SUV Total Cost $50,000
Sec 179 Deduction
Balance $25,000
Regular 1st Year Depreciation (20%) $5,000
Total First Year Write-Off $30,000
If you are planning to buy an SUV based on this big write-off, be sure to call first to find out the status of any current legislation on this issue and how the tax benefits apply to your particular situation.
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