To help you better manage your car sharing business, here is a brief overview of the annual depreciation limits and how they have been impacted by tax reform.
Understanding the Luxury Automobile Depreciation Limitation
Section 280F(a) imposes dollar limitations on Section 179 deductions and depreciation that taxpayers are permitted to take on their passenger automobiles. This limitation is commonly known as the "luxury automobile depreciation limitation." Despite the name, it often applies to cars that are not typically considered to be luxury cars.
In fact, a vehicle only has to weigh 6,000 lbs or less to be subject to this limit. As a result, a variety of vehicles, not just cars, but also trucks and vans, are actually subject to the luxury automobile depreciation limitation. In this instance, SUVs are considered as trucks for the purpose of applying the limitation.
Depreciation starts when a taxpayer places a vehicle into service for use in business, such as car sharing. The depreciation must end when the vehicle is removed from service or when the taxpayer has full recovered the vehicle's cost or other basis, whichever event happens first. The amount that you are permitted to deduct each year will depend on the year that your vehicle was placed in service.
2018 Depreciation Limits for Passenger Vehicles
Vehicle Depreciation Limits for 2018
Bonus Depreciation / First-Year Depreciation* Limits
Regular (Non-Bonus) Depreciation Limits
1st Tax Year
2nd Tax Year
3rd Tax Year
Each Succeeding Year
*Note: These limits apply only for vehicles placed into service in 2018. Cars entered into service before 2018 will use previous rules.
Both New and Used Vehicles Now Qualify for Bonus Depreciation
In addition, to the changes to the annual depreciation limits, both new and used vehicles now qualify for bonus depreciation. The TCJA eliminated the requirement that the initial use of the vehicle must begin with the taxpayer, thus making used vehicles eligible for bonus depreciation.
The TCJA also increased bonus depreciation to 100% for qualifying vehicles placed into service after September 27, 2017, and before January 1, 2023. However, after 2022, this bonus depreciation amount will decrease over the next four years:
- 80% for property placed in service in 2023
- 60% for property placed in service in 2024
- 40% for property placed in service in 2025
- 20% for property placed in service in 2026
Taxpayers are permitted to elect out of bonus depreciation for a given tax year. However, this election must be made via the attachment of a statement to the taxpayer's tax return or by filing an amended return within six months of the due date of the return. If this election is made, it cannot be revoked without the consent of the IRS
Larger Vehicles and Section 179 Depreciation
Section 179 permits taxpayers to fully deduct the cost of a purchasing or leasing a vehicle for vehicles put into service during the same year that it was bought or leased. The TCJA has also resulted in some changes in how depreciation should be handled for larger vehicles that involve Section 179 rules.
SUVs that have a gross vehicle weight rating of 6,000 lbs or higher are not subject to depreciation limits provided in the table above. However, they are subject to a $25,000 Section 179 deduction. This $25,000 limit also applies to trucks and vans with a gross vehicle weight (GVW) rating of higher than 6,000 lbs but lower than 14,000 lbs. In addition, there are no depreciation limits for SUVs that have a GVW of 14,000 lbs or more.
Although SUVs are subject to the $25,000 Section 179 limit, if they were purchased after September 27, 2017, both new and used SUVs are eligible for 100% bonus depreciation if they have a GVW rating above 6,000 lbs. Additionally, taxpayers also have the option to elect a 50% allowance for the first taxable year after that date instead of the 100% allowance. However, if this election is made, the taxpayer is not permitted to revoke it without the consent of the IRS.
For more information on Section 179 depreciation, including exceptions, please review the article here.
How to Decide Whether to Buy or Lease
If you’re currently considering buying or leasing a new vehicle for your car sharing business, it is a good idea to consider the implications of your purchase on your tax bill first. Depreciation changes as a result of the TCJA have made purchasing more favorable than leasing with regard to potential tax savings. As a result, taxpayers should consider whether the higher limits provided by bonus depreciation make buying a new car more favorable than leasing.
In most cases, whether it is best to purchase or lease a vehicle will ultimately depend on the make and model of the vehicle being purchased, as well as, when it will be placed into service. For further assistance with depreciation rules for 2018, get in contact with our team for a detailed discussion about depreciation for car sharing apps, such as Turo and Getaround.