Recent changes in tax legislation have expanded the possibilities for deducting depreciation on vehicles used for business, yet the rules continue to be complex. Moreover, regular updates to account for inflation mean that allowable depreciation deductions can vary from year to year. This guide will walk you through the process of calculating depreciation deductions for cars, SUVs, pickups, and vans in your business setting.
2 Methods for Deducting Business Vehicle Expenses Business owners must choose between the following two methods for claiming allowable business-use vehicle deductions:
- Cents-per-mile method.2024, the standard mileage rate is 67 cents per business mile for 2024 (up from 65.5 cents for 2023). This rate covers allbusiness vehicle expenses, including gas, maintenance, repairs, tires, and insurance.
- Actual expense method. Depreciation calculations come into play only if you choose this method. As the name suggests, the more time-consuming actual expense method tracks all vehicle-related costs based on the amount you paid. Depreciation is a non-cash expense, requiring specific calculations under the tax rules.
You can add actual expenses for parking and fees if you use the standard mileage rate. But your deductions will usually be higher under the actual expense method than the cents-per-mile method. If you choose to use the actual expense method, the rules for calculating depreciation write-offs vary depending on the type of vehicle you're using in your business.
Rules for Depreciating Passenger Autos For a passenger auto that's used over 50% for business, you generally must make a depreciation calculation for each year until the vehicle is fully depreciated. Passenger auto means a vehicle intended for use on public roads with a gross vehicle weight rating (GVWR) of 6,000 pounds or less. In addition to cars, this definition captures several SUVs and pickups. You can usually find the GVWR on a label on the inside edge of the driver-side door where the hinges meet the frame.
According to the general rule for depreciating passenger autos used for business, you can write off the business-use portion of the cost over six years. However, for relatively expensive passenger autos used over 50% for business, allowable depreciation deductions are subject to annual ceilings under the so-called "luxury" auto depreciation limits. If you claim first-year bonus depreciation for a new or used passenger auto used over 50% for business, the maximum first-year luxury auto depreciation allowance is increased by $8,000. However, to claim first-year bonus depreciation for a used vehicle, it must be new to you.
The maximum luxury auto depreciation deductions for a passenger auto placed in service in 2024 are as follows:
- $20,400 for year one if bonus depreciation is claimed ($12,400 if bonus depreciation isn't claimed),
- $19,800 for year 2,
- $11,900 for year 3, and
- $7,160 for year four until the vehicle is fully depreciated.
For passenger autos placed in service in 2024, the luxury auto depreciation limits only affect vehicles that cost $70,000 or more if first-year bonus depreciation is claimed. If bonus depreciation isn't claimed, the luxury auto depreciation limits only affect vehicles that cost $62,000 or more.
If you haven't yet completed your 2023 tax return (because you filed an extension), you might be interested in reviewing last year's inflation-adjusted limits. The maximum luxury auto depreciation deductions for a luxury passenger auto placed in service in 2023 are as follows:
- $20,200 for year one if bonus depreciation is claimed ($12,200 if bonus depreciation isn't claimed),
- $19,500 for year 2,
- $11,700 for year 3, and
- $6,960 for year four until the vehicle is fully depreciated.
For passenger autos placed in service in 2023, the luxury auto depreciation limits only affect vehicles that cost $69,000 or more if first-year bonus depreciation is claimed. If bonus depreciation isn't claimed, the luxury auto depreciation limits only affect vehicles that cost $61,000 or more.
Important: The luxury auto depreciation ceilings are proportionately reduced for nonbusiness use. For instance, if your business-use percentage is 60%, the ceilings are 60% of the amounts listed above.
Less-expensive vehicles used over 50% for business are depreciated over six years as follows:
- 20% of the business-use portion of the cost in year 1,
- 32% in year 2,
- 19.2% in year 3,
- 11.52% in year 4,
- 11.52% in year 5, and
- 5.76% in year 6.
If a nonluxury vehicle is used 50% or less for business, you must use the slower straight-line method to calculate your depreciation deductions.
Rules for Depreciating Heavy Vehicles Much more favorable depreciation rules apply to heavy SUVs, pickups, and vans that are used over 50% for business. These vehicles are classified as transportation equipment for federal income tax purposes. Heavy means a vehicle with a GVWR above 6,000 pounds. Quite a few SUV and pickup models pass this test.
Section 179 deductions. Because heavy SUVs, pickups, and vans are considered transportation equipment, many small and medium-sized businesses can deduct most or all of the business-use portion of their cost in the first year they're placed in service under the Sec. 179 deduction. For tax years beginning in 2024, the inflation-adjusted maximum Sec. 179 deduction is $1.22 million (up from $1.16 million for tax years beginning in 2023).
However, the inflation-adjusted limit on Sec. 179 deductions for heavy SUVs with GVWRs between 6,001 and 14,000 pounds is $30,500 for tax years beginning in 2024 (up from $28,900 for tax years beginning in 2023). These limits don't apply to heavy vehicles that aren't classified as SUVs, including:
- Vehicles designed to seat more than nine passengers behind the driver's seat. For example, many shuttle vans qualify for this exception.
- Vehicles equipped with a cargo area that's not readily accessible directly from the passenger compartment and that's at least six feet in interior length. The cargo area can be open or designed to be open but enclosed by a cap. For example, many pickups with full-size cargo beds qualify for this exception. Some quad cabs and extended cabs with shorter cargo beds may not.
- Vehicles with 1) an integral enclosure that fully encloses the driver's compartment and load-carrying device, 2) no seating behind the driver's seat, and 3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. For example, many delivery vans qualify for this exception.
Vehicles with GVWRs above 6,000 pounds that fall under the preceding non-SUV exceptions are eligible for the full Sec. 179 deduction privilege. That means the business portion of the cost of many heavy non-SUVs can often be fully written off in the first year they're placed in service under the Sec. 179 deduction privilege.
Bonus depreciation. Heavy SUVs, pickups, and vans, which are considered transportation equipment, are also eligible for first-year bonus depreciation deductions. The first-year bonus depreciation deduction was reduced to only 60% for heavy vehicles placed in service in 2024. (It was 80% in calendar year 2023.) A used vehicle must be new to the taxpayer to be eligible for first-year bonus depreciation.
Sec. 179 Deduction vs. Bonus Depreciation While the current rules for Sec. 179 deductions are generous, watch out for the following restrictions:
- The business taxable income limitation,
- The Sec. 179 deduction phaseout rule,
- The limited Sec. 179 deduction for SUVs and
- Sec. 179 deduction limitation rules for vehicles owned by pass-through entities, including limited liability companies (LLCs), partnerships, and S corporations.
These Sec. 179 limitations are beyond the scope of this article. Your tax advisor can provide additional details.
On the other hand, first-year bonus depreciation deductions aren't subject to any complicated limitations. However, for heavy vehicles placed in service in 2024 and 2023, the bonus depreciation percentages are only 60% and 80%, respectively.
You should write off the business-use portion of your heavy vehicle's cost as much as possible under your allowable Sec. 179 deductions. Then, claim first-year bonus depreciation for the remainder of the business-use portion of the cost.
To illustrate, suppose Leona buys a heavy SUV for $80,000 in 2024. She uses it 100% in her single-member LLC, which is treated as a sole proprietorship for tax purposes. How much of the vehicle's cost can Leona deduct on her tax return?
Under the limited Sec, she can deduct the first $30,500 of the SUV's cost in 2024. 179 deduction for heavy SUVs. She also can claim a first-year bonus depreciation deduction in 2024 equal to 60% of the remaining cost of $49,500 ($80,000 minus $30,500). Her bonus depreciation for the year would be $29,700 (60% times $49,500). So, for 2024, her total depreciation write-off for the vehicle would be $60,200 ($30,500 plus $29,700).
How much can Leona deduct if the heavy vehicle is a long-bed pickup not classified as an SUV? If we assume that no Sec. 179 deduction limitations apply to Leona, she can deduct the entire $80,000 on her 2024 tax return, thanks to the Sec. 179 deduction privilege.
Get It Right The federal income tax rules for calculating depreciation for vehicles used in your business can be complex. If you have questions or want more information, contact an R+R tax advisor.
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