Update: Luxury Auto Depreciation Deductions for Businesses

The Basics

• The annual inflation-adjusted allowances assume 100% business use. If business use is more than 50% but less than 100%, the allowances are proportionately reduced.
• The luxury auto depreciation limitations are the same for cars, light SUVs, light trucks and light vans. Prior to the TCJA, the limits for light trucks and light vans were slightly higher.
• If first-year bonus depreciation is claimed for a new or used passenger auto, 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 the taxpayer (you or your business entity).

Deductions for Leased Passenger Autos

Lease payments for passenger autos used for business can be deducted in their entirety or in part based on the business use percentage. Leased vehicles can’t escape the luxury auto depreciation limitations that apply to owned passenger autos. Lessees must include a designated amount in taxable income—known as the lease income inclusion—for each year of the lease if the vehicle’s fair market value (FMV) exceeds the applicable dollar amount at the beginning of the lease.

This rule is applied by reducing the lease deduction for the year by the income exclusion amount for that year. The FMV threshold for the lease income inclusion rule to come into play is $60,001 for passenger autos first leased in 2023 (up from $56,001 for 2022).

2022 Limitations

If you haven’t yet completed your 2022 tax return, you might be interested in reviewing last year’s inflation-adjusted limits. For passenger autos placed in service in 2022, the maximum luxury auto depreciation deductions are:

• $19,200 for year 1 if bonus depreciation is claimed ($11,200 if bonus depreciation isn’t claimed),
• $18,000 for year 2,
• $10,800 for year 3, and
• $6,460 for year 4 and thereafter until the vehicle is fully depreciated.

For vehicles acquired and placed in service in 2022, the $11,200 first-year luxury auto depreciation limit applies only to vehicles that cost $56,000 or more. If first-year bonus depreciation of $8,000 is claimed, the $19,200 first-year luxury auto depreciation limit applies only to vehicles that cost $64,000 or more.

2023 Limitations

For passenger autos placed in service in 2023, the maximum luxury auto depreciation deductions are:

• $20,200 for year 1 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 4 and thereafter until the vehicle is fully depreciated.

For vehicles acquired and placed in service in 2023, the $12,200 first-year luxury auto depreciation limit applies only to vehicles that cost $61,000 or more. If first-year bonus depreciation of $8,000 is claimed, the $20,200 first-year luxury auto depreciation limit applies only to vehicles that cost $69,000 or more.

Rules for Nonluxury Vehicles

Less-expensive passenger autos used over 50% for business are depreciated as five-year modified accelerated cost recovery system (MACRS) property. For example, a $40,000 car used 100% for business can have a first-year bonus depreciation of $8,000 for 2023. The allowable MACRS depreciation deductions are calculated as follows:

2028 (year 6)     $1,844 (remaining cost of vehicle)

Rules for Heavy SUVs, Pickups, and Vans Used for Business

There are more generous Federal income tax depreciation rules that can apply to SUVs, pickups, and vans with gross vehicle weight ratings (GVWRs) in excess of 6,000 pounds if they’re used more than 50% for business. Certain vehicles can also qualify for substantial first-year bonus depreciation and Section 179 deductions.

Leverage your business vehicle fleet, even if it is one vehicle, and help alleviate your tax liabilities. Reach out for help or questions.