Buying or replacing a vehicle that you’ll use in your business? A heavy SUV may provide a more generous tax break this year than a smaller vehicle. This is due to smaller business car depreciation for tax purposes.
Depreciation rules
Business cars are subject to more restrictive tax depreciation rules than those that apply to other depreciable assets. Under the “luxury auto” rules, depreciation deductions are artificially “capped.” If a taxpayer elects to use Section 179 expensing for all or part of the cost of a business car, they can claim the alternative deduction. (It allows you to write-off an asset in the year it’s placed in service.)
These rules include smaller trucks or vans built on truck chassis that are treated as cars. For most cars that are subject to the caps and that are first placed in service in calendar year 2023, the maximum depreciation and/or expensing deductions are:
- $20,200 for the first tax year in its recovery period (2023 for calendar-year taxpayers);
- $19,500 for the second tax year;
- $11,700 for the third tax year; and
- $6,960 for each succeeding tax year.
Generally, the effect is to extend the number of years it takes to fully depreciate the vehicle.
Heavy SUV
You may get a better tax break if you replace your business car with a heavy SUV due to car restrictions. That’s because the caps on annual depreciation and expensing deductions don’t apply to trucks or vans rated more than 6,000 pounds gross (loaded) vehicle weight. This includes large SUVs, many of which are priced over $50,000.
In doing so, you’ll be able to write-off a majority of the cost of a new SUV. You can do this by utilizing bonus and regular depreciation in the year you place it into service. For 2023, bonus depreciation is available at 80%, but is being phased down to zero over the next few years.
If you consider electing Section 179 expensing, an inflation-adjusted limit, separate from the general caps described above, applies. There’s also an aggregate dollar limit for all assets elected to be expensed in the year that would apply. Following the expensing election, you would then depreciate the remainder of the cost under the usual rules without regard to general annual caps.
Disclaimers
Please note that the tax benefits described above are all subject to adjustment for non-business use. Also, if business use of an SUV doesn’t exceed 50% of total use, the SUV won’t be eligible for the expensing election. It would also have to be depreciated on a straight-line method over a six-tax-year period.
Contact us for more details about this opportunity to get hefty tax write-offs if you buy a heavy SUV for business.
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