There are countless factors that influence a person’s decision to purchase a particular vehicle. Everything from whether to buy a car, truck, or SUV, to smaller factors, such as specific options and color. While tax considerations may not top the list for personal vehicles, certain qualities do have an effect on tax deductions for business vehicles.
When it comes to purchasing a business vehicle, there is one major factor to consider: the vehicle’s weight. If you are wondering what the vehicle’s weight has to do with claiming a tax deduction, you are not alone. This article will examine the often overlooked rules associated with deducting so-called “heavy” SUV’s and trucks.
Car deductions 101
To start, some background on why tax considerations would matter for a business vehicle. Generally, when a vehicle is purchased, the cost of the vehicle is not allowed to be deducted in full during the year of purchase. Instead, the cost must be deducted, or “depreciated,” over a number of years (generally five). This is where a vehicle’s weight comes into play. The vehicle weight, specifically the GVWR, or Gross Vehicle Weight Rating, has a huge effect on the amount that can be deducted for tax purposes in the first year of business use.
There are two deductions that are at the center of this article. Those deductions are the Section 179 deduction, and the bonus depreciation deduction. The Section 179 deduction allows qualified taxpayers to deduct part or all of the cost of certain vehicles in the first year of business use. Bonus depreciation allows for an additional deduction of up to 100% of the cost of the vehicle in the first year if not fully deducted under Section 179. Since there is a large amount of overlap in these two deductions, the focus of the vehicle factors is to highlight some often overlooked considerations as a whole, instead of separating each deduction. The following are some key points to consider before purchasing.
Likely the most overlooked factor in purchasing is the vehicle weight, or GVWR, as discussed earlier. Generally, a taxpayer that purchases an SUV, truck, or van with a GVWR greater than 6,000 pounds for business use will be allowed to deduct the entire cost of the vehicle in the first year placed in service, which is a substantial increase from the 50% bonus depreciation applicable for vehicles purchased on Sept. 27, 2017 or before. This change in law is a result of the Tax Cuts and Jobs Act passed in late December 2017, which increased the bonus depreciation amount from 50% to 100%. Consider purchasing a vehicle with a GVWR greater than 6,000 pounds if feasible.
Vans and trucks
If purchasing a pick-up truck or van, consider choosing a pick-up with a bed at least six feet long or a van that can seat more than nine people behind the driver’s seat. Either of these factors will generally allow for maximization of first-year deduction, and sometimes full deduction of the vehicle cost in the first year.
New vs. used
Note on purchasing new versus used: prior to the passing of the Tax Cuts and Jobs Act, there were advantages of purchasing a new vehicle instead of a used vehicle. However, with the passing of the new tax law in late December 2017, the bonus depreciation provisions were amended to allow deduction for used vehicles as well as new. Given this change, there is no advantage from a tax standpoint to purchasing a new vehicle versus a used vehicle for 2018.
The above considerations present various factors that will be advantageous for many taxpayers to consider when purchasing a vehicle. The recommendations are general in nature and do not universally apply to every taxpayer. We recommend consulting with your tax advisor when purchasing a vehicle so that your specific situation can be properly assessed.