The rules governing depreciation tax deductions for business automobiles are complicated, and vehicles that are classified as passenger autos—such as SUVs and many pickups—fall under special limitations that may result in full depreciation taking longer than expected.
Here is a quick guide to some of the rules governing tax depreciation and deductions for business vehicles.
Calculating deductions
If you use the standard mileage rate when calculating deductions (for 2021 this rate is 56 cents per business mile driven), you won’t need to worry about any separate depreciation calculations, as the rate includes a built-in depreciation allowance.
If you choose to calculate deductions for your passenger auto using the actual expense method, however, you will need to make a separate depreciation calculation for every tax year until your business vehicle is fully depreciated.
Under this general rule, depreciation is calculated as follows over a six-year span:
- 20% for year 1
- 32% for year 2
- 19.2% for year 3
- 11.52% for years 4 and 5
- 5.76% for year 6
The straight-line method—rather than the percentages listed above—must be used to calculate depreciation deductions if your vehicle is used 50% or less for business purposes.
Specified annual depreciation ceilings apply for passenger autos whose cost is greater than the applicable amount for the year the vehicle is placed in service. These depreciation ceilings may change annually and are indexed for inflation.
If a passenger auto that cost more than $59,000 is placed in service in 2021, the depreciation ceilings for the vehicle will be as follows:
- $18,200 for year 1 if you choose to deduct $8,000 of first-year bonus depreciation
- $16,400 for year 2
- $9,800 for year 3
- $5,860 until the vehicle is fully depreciated
If a passenger auto that cost more than $51,000 is placed in service in 2021, the depreciation ceilings for the vehicle will be as follows:
- $10,200 for year 1 if you don’t choose to deduct $8,000 of first-year bonus depreciation
- $16,400 for year 2
- $9,800 for year 3
- $5,860 until the vehicle is fully depreciated
These ceilings are reduced proportionately for any nonbusiness use of the vehicle, and the straight-line method will need to be used to calculate depreciation deductions for any vehicle that is used 50% or less for business purposes.
Depreciation rules for larger vehicles
Vans, SUVs, and pickups that are used over 50% for business and have a gross vehicle weight rating (GVWR) of over 6,000 pounds may be eligible for much more favorable depreciation rules since they’re classified as transportation equipment for depreciation purposes. Many SUVs and pickups are heavy enough to meet this specification—check the label on the inside edge of your vehicle’s driver-side door to find the vehicle’s GVWR rating.
Depreciation limits affect after-tax values
These depreciation limits are important to keep in mind because the tax savings from related depreciation deductions reduce the true cost of a business asset—thus changing the after-tax cost of your business vehicle. And due to time-value-of-money considerations, the value of the related tax savings is reduced to the extent depreciation deductions are reduced and therefore deferred to future years.
If you lease an expensive, business-owned passenger auto, different rules will apply. For more information, contact us.