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Are you a business owner considering purchasing a vehicle or truck in 2023? Claiming depreciation on that vehicle can make a huge difference in your tax liability.
At first glance, auto depreciation might seem like an overwhelming topic. So this blog post will break down everything you need to know about depreciating (aka “writing off”) automobiles to maximize your savings.
Depreciation is the loss in value of an asset due to wear and tear, and it can be a significant tax deduction for businesses that own vehicles.
The IRS releases a Revenue Procedure with the inflation adjusted dollar limitations for automobiles each year to accurately reflect the declining value of a vehicle over time.
For the 2023 tax year, the IRS has set the depreciation limitations for passenger automobiles at:
It’s important to note that these limits are for vehicles used 100% for business purposes. If you also use the vehicle for personal use, the depreciation deduction must be adjusted.
Taking bonus depreciation may also be an option for vehicles in their first year of service.
Bonus depreciation is a tax incentive that allows organizations to deduct a significant portion of the cost of equipment in the year it’s placed in service rather than depreciating the cost over time.
For 2023, businesses can write off 80% of most qualifying assets using bonus depreciation. In 2024, that percentage will drop to 60%. Unless the law changes, the bonus depreciation percentage will decrease by 20 points each year until it eventually phases out completely in 2027.
However, the IRS caps the amount of bonus depreciation taxpayers can claim on passenger automobiles.
For passenger automobiles that claim bonus depreciation, the inflation updated amounts for 2023 are:
The additional first-year “bonus” depreciation is available for both new and used vehicles as long as it was purchased and placed in service by December 31, 2023.
It’s essential to keep in mind that you can opt out of claiming bonus depreciation on assets. However, if you opt out of claiming bonus depreciation on one asset, you opt out of it for all property in that class. In other words, you can’t pick and choose which vehicles you take bonus depreciation on.
Fortunately, the Section 179 deduction allows more flexibility than bonus depreciation because you can select assets and amounts.
Section 179 allows businesses to deduct up to 100% of an asset in the year it was purchased and placed in service. For cars and smaller SUVs, there’s still a cap on your first-year deduction under Section 179. However, vehicles with a GVW over 14,000 pounds, such as cargo vans, delivery trucks, moving vans, and passenger buses, can qualify for the entire Section 179 deduction.
Remember that you must use the vehicle at least 50% for business to qualify for Section 179 expensing. If you use it less than 50% for work, straight-line depreciation is the only option available.
Certain vehicles are exempt from the depreciation caps outlined above. Those include:
Maximizing depreciation deductions can save you a significant amount. So here are some tips to help you make the most of your vehicle-related deductions.
To take advantage of any tax deductions, keeping detailed and accurate records of all expenses related to your business vehicles is crucial.
When you buy a new or used vehicle, keep documentation of the purchase price and any trade-ins or adjustments.
There are two methods for writing off vehicle expenses, including depreciation.
Under the standard mileage rate, you track your total business miles for the year, then multiply those miles by the standard mileage rate—a figure issued by the IRS each year. For 2023, the standard mileage rate for business use is 65.5 cents per mile.
If you use the actual expense method, you still need to track your business miles. You also need to track all your costs of owning and operating the vehicle, including fuel, oil, repairs and maintenance, taxes and registration, loan interest, insurance, etc.
To calculate your deduction, divide your total miles by your business miles to get the business-use percentage. Then multiply that percentage by your actual expenses to figure out your deduction.
The standard mileage rate is easier to calculate but may not always result in the highest deduction. The actual expense method requires more record-keeping but may be more beneficial in some situations.
You generally can’t claim Section 179, bonus, or regular depreciation if you lease a company vehicle. Instead, you write off the cost of operating the car using either the standard mileage rate or the actual expense method. If you choose the actual expense method, you can include lease payments in your total expenses.
However, special rules apply to passenger vehicles first leased in 2023 with a fair market value (FMV) over $60,000.
Rather than depreciating the vehicle, you can deduct the part of the lease payment representing business use. But the lease inclusion rules require you to increase your income each year of the lease to achieve parity with the depreciation limits.
The IRS’s Rev. Proc 2023-14 provides a table with the lease inclusion amount for lease terms beginning in 2023.
For example, if have a car with a fair market value of $75,000 and a lease term beginning January 1, 2023, and used the vehicle for business purposes only, your income inclusion amounts for each year of the lease would be:
Calculating depreciation and deducting vehicle expenses is complex. So if you need help maximizing your auto depreciation deductions in 2023 and beyond, contact NewWay Accounting. We can help you choose the right depreciation method and take advantage of available tax incentives that save money and improve your bottom line.
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