We frequently receive questions about depreciating and expensing business vehicles. This post provides a brief summary of the general rules for 2021.
Business owners looking to purchase vehicles for their business operations often wonder whether they can take bonus depreciation on those vehicles in the year of purchase. The short answer is yes, most vehicles used for business purposes qualify for bonus depreciation under the current tax code. However, there are some limitations and calculations required to determine the exact deduction amount. In this comprehensive guide, we’ll break down everything you need to know about claiming bonus depreciation on business vehicles in 2021.
Overview of Bonus Depreciation
First, let’s review what bonus depreciation is. Bonus depreciation allows businesses to immediately deduct a percentage of the purchase price for new equipment and vehicles in the first year. This is much more beneficial than standard depreciation which spreads deductions over 5-7 years.
The Tax Cuts and Jobs Act significantly expanded bonus depreciation from 2018-2022. During this period, businesses can deduct 100% of the purchase price for qualified new and used vehicles in the first year. After 2022, the percentage phases down incrementally until bonus depreciation expires again in 2027.
Vehicles That Qualify for 100% Bonus Depreciation
The IRS broadly defines vehicles eligible for 100% bonus depreciation in 2021 as
- New or used passenger vehicles with a gross vehicle weight rating (GVWR) of 6,000 pounds or less
- New or used SUVs, trucks, and vans with a GVWR between 6,001-14,000 pounds
Essentially, any vehicle with a GVWR up to 14,000 pounds that is used over 50% for business purposes qualifies This encompasses many popular truck, van, and SUV models used for commercial purposes
However, as we’ll explain next, there are dollar limitations imposed on the deduction amount.
Dollar Limitations and Calculations
While 100% bonus depreciation is available on vehicles, the IRS does place maximum dollar limits on the amount that can be deducted in Year 1:
- Passenger Vehicles Under 6,000 Pounds GVWR: $10,200 for first year ($18,200 if bonus depreciation is taken)
- SUVs, Trucks, Vans 6,001-14,000 Pounds GVWR: $25,000 section 179 deduction limit in 2021
For passenger vehicles, the deduction is also limited to the percentage of business use. For example, if a vehicle is used 60% for business, only 60% of the $10,200 limit can be deducted.
However, the section 179 limit does not apply to certain commercial-grade trucks and vans meeting exemption criteria. These vehicles can deduct the full purchase price in Year 1.
Claiming the Deduction
To claim bonus depreciation on a business vehicle, you must file IRS Form 4562 with your tax return The amount calculated under the above limitations is entered in Part III of the form You must also attach a statement detailing business use percentage and gross vehicle weight confirmation.
Maintaining detailed mileage logs and purchase documentation is key to supporting your deduction claims if audited by the IRS. Consulting a tax professional can help ensure you maximize deductions and avoid miscalculations.
Weighing Bonus Depreciation vs. Section 179
Another option along with bonus depreciation is the Section 179 deduction on business vehicles. This allows deducting up to $1 million on new and used vehicle purchases. For 2021, the maximum Section 179 deduction on SUVs and trucks over 6,000 pounds GVWR is $25,000.
So which is better? Here are some key factors to consider:
- Section 179 has no phase out like bonus depreciation and can be taken together in the first year
- Bonus depreciation does not cap deductions on commercial trucks and vans
- Section 179 carries forward indefinitely, bonus depreciation does not
Weighing your specific business use and vehicles can determine the optimal deduction strategy. Many taxpayers use both Section 179 and bonus depreciation to maximize first-year write-offs.
The Bottom Line
Claiming bonus depreciation provides a major tax advantage for businesses purchasing vehicles. While limitations and calculations are required, most commercial-use trucks, vans, and SUVs qualify for 100% deductions in 2021 and 2022. To ensure compliance and optimize your tax savings, consult with a tax professional when adding new vehicles to your business. With proper documentation and planning, you can put thousands of extra dollars back in your pocket each year.
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We frequently receive questions about depreciating and expensing business vehicles. This post provides a brief summary of the general rules for 2021.
Vehicles that are 6,000 Pounds or Less
IRC §280F(a) imposes dollar limitations on the depreciation and IRC § 179 expensing deductions that can be taken for passenger automobiles. This limitation is often referred to as the “luxury automobile depreciation limitation,” even though it applies to vehicles not commonly considered “luxury automobiles.” Passenger automobiles, by definition, weigh 6,000 pounds gross vehicle weight or less.
The limits of the depreciation deduction (including section 179 expense deductions) for luxury automobiles placed in service in 2021 for which bonus depreciation is not taken are as follows: 1st Tax Year $ 10,200 2nd Tax Year $ 16,400 3rd Tax Year $ 9,800 Each Succeeding Year $ 5,860
For new or used passenger automobiles eligible for bonus depreciation in 2021, the first-year limitation is increased by an additional $8,000, to $18,200.
Taxpayers who purchase a passenger automobile subject to the IRC § 280F limitations must consider the impact of taking bonus depreciation on future depreciation deductions. Rev. Proc. 2019-13 provides a safe harbor that allows for a yearly deduction.
SUVs with a gross vehicle weight rating above 6,000 lbs. are not subject to depreciation (including bonus depreciation) limits. They are, however, limited to a $26,200 section 179 deduction in 2021. IRC § 179(b)(5)(A). No depreciation or §179 limits apply to SUVs with a GVW more than 14,000 lbs. Trucks and vans with a GVW rating above 6,000 lbs. but not more than 14,000 lbs. generally have the same rules: no bonus depreciation limitation, but a $26,200 section 179 deduction limit. These vehicles, however, are not subject to the section 179 limit if any of the following exceptions apply:
- The vehicle is designed to have a seating capacity of more than nine persons behind the drivers seat;
- The vehicle is equipped with a cargo area at least 6 feet in interior length that is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment; or
- The vehicle has an integral enclosure, fully enclosing the driver compartment and load-carrying device, does not have seating behind the drivers seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.
Although SUVs are subject to the $26,200 section 179 limit in 2021, they are eligible for 100% bonus depreciation if they are above 6,000 lbs. 100 percent bonus is available through the end of 2022. After that, it is scheduled to drop to 80 percent in 2023.
What Vehicles Qualify For Bonus Depreciation? – AssetsandOpportunity.org
FAQ
Do vehicles qualify for 100% bonus depreciation?
Bonus Depreciation: main points and limitations
There is no maximum amount and no limit on purchases. You can deduct your entire asset or vehicle fleet regardless of how much you paid for the vehicles. Bonus Depreciation ramped down from 100% in 2017 to 80% in 2023 and continued ramping down to 60% in 2024.
What are the depreciation rules for cars in 2021?
| ABLE 1. DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES ACQUIRED AFTER SEPTEMBER 27, 2017, AND PLACED IN SERVICE DURING CALENDAR YEAR 2021, FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION APPLIES | |
|---|---|
| Tax Year | Amount |
| 1st Tax Year | $18,200 |
What qualifies for bonus depreciation in 2021?
Useful life: To qualify for bonus depreciation, the asset must have a useful life of 20 years or less. For example, a building wouldn’t be eligible for bonus depreciation, but a vehicle or piece of equipment would be. Listed property: This type of asset can be used for business and personal purposes.
What vehicle qualifies for 179 deduction 2021?
You can get a tax write-off if you purchase a vehicle that weighs over 6,000 pounds for business purposes. Section 179 deductions allow companies to write off up to $30,500 of the purchase price of a qualifying vehicle used for business purposes.