If your business is preparing to replace a vehicle or buy a new one, you should know that a heavy SUV might provide a more substantial tax break this year than what you’d receive from a smaller vehicle.
The reason? Larger business vehicles are depreciated differently on your tax returns than smaller ones.
Depreciation guidelines
Compared to other depreciable assets, business vehicles are subject to more restrictive tax depreciation rules.
Depreciation deductions are automatically capped under “luxury auto” rules. If a taxpayer decides to use Section 179 of the Internal Revenue Code to expense all or part of the cost of a vehicle, these caps can apply here as well, allowing an asset to be written off in the year it’s placed into service. Included in these rules are smaller trucks and vans built on truck chassis.
For most vehicles that are subject to these caps and begin service in 2023, the expensing deductions or maximum depreciation are as follows:
- First tax year in recovery period - $22,200
- Second tax year - $19,500
- Third tax year - $11,700
- Every subsequent year - $9,960
Typically, this extends the number of years it takes to depreciate the business vehicle completely.
Caps on deductions
Caps on expensing deductions and annual depreciation for passenger vehicles don’t apply to trucks or vans that weigh more than 6,000 pounds. This rule also includes large SUVs, which can sometimes cost over $50,000, so from a tax timing perspective, you may be better off replacing your business vehicle with a heavy SUV to avoid the restrictions on smaller cars.
In most instances, you’ll have the ability to write off a substantive amount of the cost of a heavy SUV that’s used for business purposes by taking advantage of the bonus and regular depreciation beginning from the year you put the vehicle into service. Bonus depreciation is currently available at 80% but will be reduced to zero over the coming years.
If you opt to expense all or part of the cost of a heavy SUV using Section 179, it’s essential to be aware that as of 2023, an inflation-adjusted limit of $28,900 (up from $27,000 in 2022) applies separately from the caps listed above.
Please note that for all assets you elect to expense in a year, there’s an aggregate dollar limit that applies. Once you’ve completed the expensing election, you’ll need to depreciate the rest of the cost under the standard rules without regard to annual caps.
It’s also important to be aware that the tax benefits listed above are subject to adjustment for non-business use. Additionally, the vehicle won’t be eligible for expensing if the business use of the SUV doesn’t exceed 50% of total use, meaning it would be required to be depreciated on a straight-line method over a period of six tax years.
Trust your tax questions to Smolin
If you have questions or would like assistance with your tax return, the CPAs at Smolin can help. Contact us for more information about how to get the most tax write-offs from your company vehicle this tax season.