The GVWR for the 2022 Audi Q8 is 6,471 lbs.
Therefore, the Audi Q8 satisfies the IRS’s threshold of 6000 pounds or more, and by combining Section 179 and Bonus Depreciation, you can earn a 100% deduction on the cost of a vehicle, including fees and sales taxes.
In This Article...
What automobiles can be written off under Section 179 in 2021?
any vehicle with a minimum GVWR of 6,000 pounds and a maximum GVWR of 14,000 pounds (3-7 tons). This includes a sizable number of full-size SUVs, vans, and pickup trucks.
Can you 179 a high-end car?
Sec. 280F’s header, “Limitation on depreciation for luxury autos,” and the nickname “luxury auto caps” that is frequently used to refer to the provision’s limits have been two of the Code’s more deceptive words.
For years, these caps have defied their name by placing restrictions on the amount that passenger cars used for commercial purposes can be depreciated and expensed. Prior to the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, which increased these caps to a level more deserving of the moniker. The TCJA roughly tripled the luxury auto caps for vehicles put into service in 2018 and beyond, raising the amount of permissible depreciation during the recovery period to levels that are close to what some luxury models may realistically be regarded to cost. Therefore, if CPAs haven’t previously done so, they should communicate these more advantageous guidelines for buying or leasing business vehicles with their corporate customers. Their customers will certainly appreciate it, and it’s likely that the neighborhood auto dealers won’t mind either.
Prices outpace luxury caps
For a passenger car that is primarily (more than 50%) utilized for business, Sec. 280F(a) sets limits on depreciation or expensing under Sec. 179, with precise dollar limits for each year in the recovery period. There is also an annual restriction on any amount considered as an expense during any tax year following the conclusion of the recovery period for any basis that is still unrecovered. Any four-wheel vehicle with a gross vehicle weight of no more than 6,000 pounds unloaded, or simply gross vehicle weight for a truck or van, is considered a passenger car for these reasons (Sec. 280F(d)(5)(A)). As a result, “light trucks and vans” are likewise covered by the luxury auto caps. Because of this, heavy sport utility vehicles (SUVs), particularly those with a rated weight of more than 6,000 pounds, are exempt, however they might be subject to the Sec. 179 expensing limits that is detailed below.
The restrictions were set at $4,000 for the initial tax year and $6,000 for each consecutive year when Sec. 280F was passed in 1984. When compared to the original manufacturer’s suggested retail price (MSRP) of a Toyota Corolla in 1984, which was $6,498, those caps might nevertheless allow a far more expensive car to totally depreciate within a few years.
The modified accelerated cost recovery system (MACRS), which was then-new, included cars and trucks as property with a five-year recovery period, and the luxury auto caps were harmonized by the Tax Reform Act of 1986, P.L. 99-514. It stipulated caps of $2,560 for the initial year of the recovery period, $4,100 for the following year, $2,450 for the following year, and $1,475 for each year after that.
Nevertheless, between 1984 and 2017, the Sec. 280F(a) caps increased by 23% or 27%, depending on which year in the recovery period is being contrasted. What is certain is that for the 2017 tax year, the maximum depreciation or expensing amounts under Sec. 280F were $3,160 for the first year, $5,100 for the second year, $3,050 for the third year, and $1,875 for each succeeding year. The reason for these apparent differences between price, the CPI index, and the Sec. 280F(a) caps is unclear (or, if less, the applicable MACRS percentage).
For five-year MACRS property, the half-year practice often applies, which means that only half of the full-year MACRS depreciation is permitted for the first year the facility is put into operation. The MACRS recovery period is actually six years because the convention also recognizes the property as having been put into operation in the middle of the year. Therefore, the luxury auto caps would permit a maximum amount of $16,935 in depreciation to be deducted over the course of six years for a passenger vehicle placed in service in 2017.
TCJA resets the caps
Without the TCJA, the $19,400 Corolla put into service in 2017 and utilized strictly for business purposes may still have an unrecovered basis of $2,465 after its MACRS recovery term (of which only $1,875 could be deducted as an expense per tax year after that period) because of the luxury auto restrictions. However, due to the TCJA’s increase in these values, an automobile put into service in 2019 would be permitted a maximum total depreciation of $53,180 for the MACRS period (see table, “Luxury Auto Caps, 2017 and 2019). If utilized exclusively for business purposes during the MACRS period, a 2019 BMW 530i (base MSRP $53,400) may practically be entirely written off by a company owner at that rate.
Bonus depreciation
The Sec. 168(k) first-year depreciation (bonus depreciation) percentage for property placed in service after September 27, 2017, but prior to January 1, 2023, was also enhanced by the TCJA to 100%. Sec. 168(k)(2)(F)(i) specifies that the pre-TCJA $8,000 luxury auto bonus depreciation cap is still in effect. With usual depreciation and this added, the first-year auto maximum for 2019 is actually $18,100.
As mentioned above, the luxury auto caps do not apply to heavy SUVs. Therefore, if the heavy SUV qualifies for bonus depreciation and the taxpayer doesn’t choose to opt out, the car can be written off at full value in the first year.
Heavy SUVs with a curb weight of 14,000 pounds or less, owners who choose not to take advantage of bonus depreciation, or who are qualified for it, can often deduct up to $25,000 in expenses under Section 179(b)(5)(A) in any tax year (inflation-adjusted to $25,500 for 2019). Furthermore, the luxury auto caps do not apply to these vehicles. SUVs that are heavy and weigh more than 14,000 pounds are exempt from the Sec. 179 cost cap.
Example: X spends $60,000 to buy a large SUV with a 9,000-pound gross vehicle weight and uses it during the 2019 tax year. In 2019, the SUV qualifies for bonus depreciation. The entire $60,000 cost may be deducted for depreciation if X does not opt out of bonus depreciation. If X chooses not to take advantage of bonus depreciation, X may deduct $25,500 in expenses under Section 179 and $34,500 in depreciation under the MACRS tax code. In contrast, if the SUV weighed more than 14,000 pounds and X decided against bonus depreciation, subject to the overall Sec. 179 expense deduction restrictions, X may deduct the entire $60,000 cost of the vehicle from his or her taxes under Sec. 179.
Income inclusion for leasing has a higher exemption amount
The TCJA also brought some welcome news for companies that lease cars for an extended period of time rather than buying them. Taxpayers are only allowed to deduct leasing expenses up to an amount that is “essentially similar to the luxury auto purchase caps” (Section 280F(c)(3)), as stated in Sec. 280F(c)(2). According to Regs. Sec. 1.280F-7(a), the method for calculating the lease payments’ corresponding income inclusion amount is based on the car’s fair market value (FMV) in the tax year in which it is used under a lease, prorated by the number of days of the lease term that are included in the tax year, multiplied by the percentage of business use (if less than 100 percent ). Tables of inclusion amounts are published by the IRS. The most recent example can be seen in Rev. Proc. 2019-26, Table 4, which indicates that no revenue inclusion is made for vehicles with an FMV of $50,000 or less. According to Rev. Proc. 2017-29, Table 5, the lease inclusion for 2017 leases started when the FMV exceeded $19,000.
General utility matters, too
The majority of business owners undoubtedly aren’t actually looking for luxury; they just want to complete a task that requires using an automobile. As a result, the examples of luxury automobiles provided here are probably not particularly applicable to the typical business operations, such as light-duty pickup and delivery, transporting workers and equipment to and from a job site, etc. However, due to unique requirements and heavy-duty equipment options for high mileage, wear, and extensive usage, vehicles for these reasons may frequently cost more than a family sedan. Therefore, despite its name, lifting the luxury auto cap can be advantageous for the typical workday driving that most business owners engage in.
The crucial issue is that these business owners are aware of these greater limits so they may plan their purchases, company growth, or new initiatives properly. Regardless of the type of vehicle or the size or nature of the business, no cost/benefit analysis of a purchase is complete without taking the tax consequences, including depreciation and expensing, into account. When it comes to moving business clients closer to financial success and security, advice from CPA tax advisers can be quite helpful.
What kind of car can be deducted under Section 179?
Luxury SUVs lie between 6,000 and 14,000 pounds in weight, while section 179 luxury cars must have a GVWR of 6,000 pounds or less. As previously mentioned, the maximum first-year Section 179, Bonus Depreciation, and ordinary depreciation limit for automobiles is $18,200, while the cap for SUVs is $26,200.
Mercedes G-Class
The V8 engine in this top-of-the-line SUV has 416 horsepower. Its $6,945 pound GVWR and $154,520 MSRP make it eligible for the $26,200 SUV Section 179 deduction for business owners.
Tesla Model X
This high-end crossover SUV has an electric powertrain with a 1,020 maximum horsepower. Its starting MSRP is $79,990, and its GVWR is 6,800 pounds. A section 179 deduction of $26,200 is available to qualified business owners under the SUV Section.
Range Rover P525
The V8 engine in this top-of-the-line, luxurious SUV has 518 horsepower. It has a $105,950 MSRP and a 6,967 pound GVWR, and Section 179 allows qualified business owners to deduct up to $26,200 from that price.
Section 179 vehicles get you on the road to big tax deductions.
Have you bought or financed a vehiclenew or usedfor your small business? In that case, you can be eligible for a hefty tax break. As long as your vehicle is eligible for the Section 179 deduction, you may deduct all or a portion of its cost in the first year that you use it for business.
The views expressed in this content are meant mainly for general information and do not constitute personalized advice or suggestions for any particular person.
Types of vehicles that are eligible.
Before we get started, it’s important to be aware that the IRS occasionally publishes changes, instructions, and new regulations pertaining to Section 179. Use this information as a starting point; the eligible automobiles are subject to change.
In general, passenger cars, large SUVs, trucks, and vans used at least 50% of the time for business-related reasons qualify for the Section 179 tax deduction. So, for instance, a pool cleaning company may write off the cost of a brand-new pickup truck it uses to travel to and from clients’ houses.
Small vehicles.
Small automobiles are used every day by millions of small enterprises and lone entrepreneurs. These include tiny utility trucks, crossovers, and passenger automobiles. The Section 179 deduction cap for small vehicles under 6,000 pounds is $10,100 in the first year of use and $18,100 with bonus depreciation.
The deduction allowance is proportionately decreased if the vehicle is not utilized exclusively for business. The cap is $5,050 ($10,100 x.50) if a florist, for instance, buys a vehicle that is used 50% for business.
Heavy vehicles.
A commercial vehicle must weigh at least 6,000 pounds and not more than 14,000 pounds to be considered “heavy.” Many pickup vehicles, SUVs, and vans weigh more than 6,000 pounds. On the label or in the vehicle information packet provided by the manufacturer, the gross vehicle weight rating (GVWR) is frequently mentioned. The inside of the driver’s side door, either on a sticker or a small metal badge, bears the manufacturer’s label, which includes the make, model, features, GVWR, and other information.
The maximum Section 179 deduction for heavy vehicles is $25,000 Let’s imagine you borrow $45,000 to buy a large SUV, and you only use it for your little business. Under Section 179, you may write off $25,000 and receive a $10,000 first-year depreciation (half of the remaining purchase price after the Section 179 deduction). Consequently, the $45,000 SUV purchase will result in a $35,000 first-year deduction. In some circumstances, a regular depreciation percentage is applicable, but only a tax expert can establish this.
Special rules.
You will probably learn about some of the particular regulations when you discuss Section 179 for autos with your accountant or tax advisor. One of these laws relates to pay. First of all, your net taxable income for the year cannot be greater than your Section 179 deduction. Secondly, you are not permitted to use your car to transport people or items for rent or payment.
Whether you acquire a new or used car, you have to put it to use, often known as “commercial use,” during the tax year you buy it before December 31. If you choose to take advantage of the Section 179 deduction, you must show documentation demonstrating your car was utilized for business purposes. If your company is ever subject to a tax audit, this will be useful.
Helpful links for small business owners.
Vehicles under Section 179 infographic An illustration of how Section 179 applies to commercial vehicles
impromptu tax planning A must-read if this year’s tax deadline is approaching.