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.
To see how this works, let’s hypothetically say you and an associate each bought a car. Your car costs $50,000 while your associate’s costs $32,000. You both use your vehicles 75% for business. Cars are in the 5-year life depreciation category and the first-year depreciation for 5-year life items is 20%. However, your depreciation deduction for the year (including any choice to expense part of the car’s cost) will be subject to the first-year “luxury vehicle” limitation, which is $3,160 for 2016. However, there is a special 50% bonus depreciation allowance for boosts the “luxury auto limitation” by $8,000 to a total of $11,160 for 2016. The limit is $400 more for trucks and vans purchased in 2016.
Your Car | Associates Car | |||
| 1. Vehicle Cost | $50,000 | $32,000 | ||
| 2. 50% Bonus Depreciation | 25,000 | 16,000 | ||
| 3. Balance | 25,000 | 16,000 | ||
| 4. 20% First year Depreciation (20% of line 3) | 5,000 | 3,200 | ||
| 5. Depreciation Before Limit | 30,000 | 19,200 | ||
| 6. Luxury Auto Limit | 11,160 | 11,160 | ||
| 7. Allowable Deduction (lesser of 5 or 6) | 11,160 | 11,160 | ||
As you can see, both you and your associate’s depreciation for the first year is the same amount because of the luxury auto limits. Your associate will be able to deduct the same amount as you, even though his car had a much lower cost than yours.
Thus, your first-year depreciation (you used the vehicle 75% for business) will be $8,370 (11,160 x .75)
This may seem unfair, but there is an alternative that can help. Certain sports utility vehicles (a Suburban for example) exceed 6,000 pounds unloaded gross weight and have special rules.
CAUTION: Since bonus depreciation is being phased out, the bonus depreciation applicable to luxury vehicles is also being phased out after 2017. Thus the luxury auto rates shall be increased by the following bonus depreciation rates:
2015 through 2017 – $8,000
2018 – $6,400
2019 – $4,800