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Tax Reform Increases First Year Depreciation Deductions for New and Used Vehicles Purchased in 2018

The 2017 Tax Cuts and Jobs Act (“TCJA”) presents a significant tax planning opportunity for businesses in the market to purchase a vehicle in the form of an increase in first-year bonus depreciation deduction which now applies to both new and used qualified property.  While you are shopping for your vehicle, you may want to look for a new or used SUV, truck or van and pay attention to the gross vehicle weight (GVW).  

New Depreciation Rates
The new law increased the first-year bonus depreciation deduction from 50% to 100% for qualified new and used property acquired and placed in service after 9/27/2017 (no binding contract to acquire can exist at 9/27/17) and before 1/1/2023.   In later years, first year bonus depreciation deduction is phased down to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 until it is completely phased out in 2027.  Prior law, which excluded used property, provided for a 50% deduction in 2018, 30% in 2019 and was completely phased out in 2020.

The Weight of Your Vehicle Matters
In order to take advantage of this 100% deduction in 2018, you must first determine that the unloaded gross vehicle weight (GVW) of the new or used SUV, truck or van is greater than 6,000 pounds.  This determination is important because the depreciation on passenger automobiles with a GVW of 6,000 pounds or less is limited to the lesser of the depreciation calculated under IRC §168(k) or the luxury auto depreciation limits pursuant to IRC §280F.  The TCJA also increased these limits, which for vehicles purchased in 2018 are as follows:

$10,000 for the first year (increased by $8,000 if bonus depreciation is claimed)

                $16,000 for the second year

                $ 9,600 for the third year

                $ 5,760 for the fourth year and beyond until the vehicle is fully depreciated

As noted above, the first-year luxury auto depreciation limitation is increased by $8,000 if the vehicle qualifies for bonus depreciation.  However, if bonus depreciation is claimed, the vehicle is considered fully depreciated in the first year and no future depreciation deductions would be allowed pursuant to IRC §168(k).  This means if you take 100% bonus depreciation, the deduction will be $0 in years two through six.  Under IRC §280F’s catch-up rule, the unrecovered basis could not be recovered until year seven, subject to the $5,760 yearly limitation. You are truly accelerating your deduction by utilizing bonus depreciation.

What This Means to Your Bottom Line
In conclusion, the taxpayer who purchases a $60,000 new or used SUV, truck or van with a GVW of over 6,000 pounds will escape the luxury automobile limitation and will be entitled to deduct the full cost in the form of 100% bonus depreciation in 2018.  This deduction is $42,000 more than that same taxpayer would be entitled to if the new or used vehicle purchased was subject to the luxury auto depreciation limitation of $18,000 for 2018.

For more information regarding the bonus depreciation deduction, please contact a member of the Herbein tax team, or email us at info@herbein.com. Article written by Sondra A. Castner.