If you are a business owner, the Tax Cuts and Jobs Act has brought about a welcome news for you! The Act allows small business owners to deduct various costs associated with vehicles used for business purposes, including the advantageous first-year depreciation breaks for such vehicles.
Let’s check out the favorable moves that TCJA has brought about for small business owners!
Luxury Auto Depreciation Allowance
Business owners who use passenger vehicles (acquired after 12/31/17) to fulfill over 50% of business functions are eligible for the TCJA luxury auto depreciation allowances. The TCJA places a maximum allowance ceiling for all passenger vehicles placed into service in 2018:
- $10,000 for the first year. If you claim the first-year bonus depreciation, then the maximum first-year luxury auto depreciation allowance increases by $8,000, thus extending it from $10,000 to $18,000.
- $16,000 for the second year.
- $9,600 for the third year.
- $5,760 from the fourth year onwards until the vehicle is completely depreciated.
However, for SUVs and vehicles weighing over 6,000 pounds, the allowance limit is much higher – any such heavyweight vehicles that have been put to business use since 2017, nearly 50% of the cost can be claimed under Section-179 with an additional 50% of the cost (not expensed under Section-179) eligible for bonus depreciation allowance. Apart from that another 20% of the leftover cost for the first-year depreciation can also be applied.
An important thing to remember here is that if a vehicle is not used to a full 100% for your business, the allowance is modified and cut back proportionately. The maximum deduction for a used car, however, stands at $3,160.
Standard Mileage Rate
For self-employed individuals and small business owners, the IRS has fixed a standard mileage deduction rate at 53.5 cents/mile. Two things are essential for determining the number of business miles for your business vehicles: first is the total number of miles driven in a year, and second is the total number of miles driven solely for business purposes.
To track these numbers, you can start writing down the odometer reading from the moment you start using a vehicle for your business and continue recording it until the end of the business year. Business miles will usually include things like driving to meet with clients, meet with your accountant/lawyer, and trips to the bank and the business supply store.
However, you cannot include travel such as commuting to your place of work under the deductible expense tab. Also, you cannot include personal interests within the business-related travel expense. For instance, if you go on a business trip and choose to visit a place solely for the purpose of your personal entertainment, you cannot include it within the business mileage.
Apart from the standard mileage deduction rate, small business owners are also entitled to deduct registration costs, property tax fees, interest expenses incurred on auto loans, parking and toll costs, provided that all such expenses have been incurred for business purposes. Given below is a list of auto-related expenses that qualify for deduction:
- Garage rent
- Maintenance and repairs
- Rental or lease payments
- Vehicle loan interest
- Registration fees and property taxes
- Tolls and parking fees
While TCJA now offers such benefits, it has also eliminated certain expenses from the list such as the employee deductions for unreimbursed vehicle expenses. There are many companies/firms that require the employees to use their personal vehicles for business purposes. Under the previous law, employees could claim the total amount of unreimbursed business-related vehicle expenses as miscellaneous itemized expenses subject to 2% of the AGI. The federal tax reform, however, eliminates the deduction for miscellaneous itemized expenses.
What About Leased Vehicles?
When it comes to leased vehicles, TCJA allows you to apply the standard mileage deduction rate on the leased vehicles used for business purposes. However, once you opt for the standard mileage deduction rate, you cannot go for the actual expense rate later. Also, if you choose the standard mileage deduction rate, instead of deducting the entire lease payment amount, only the business-related expense is deducted.
Apart from this, for leased vehicles whose values exceed a certain amount, you have to subtract a portion, known as the “income inclusion” amount from the total deductible expense. As of 2018, the income inclusion amount stands at $119.
Now that you know all the details about the deduction rates and ceilings for business vehicles, you need to keep a detailed record of all your business-related vehicle expenses since the IRS is very particular about deducting such costs. This includes keeping track of your business miles, and all the other expenses mentioned above.
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