Vehicle Depreciation Tax Planning

Many companies opt to use company-owned vehicles. Whether it be a large cement mixing truck for use on a construction site, a company van sent out with service professionals on work jobs, or a company car for executives, these purchases are important to the practical nature of some businesses and in some cases the image of the company. They can also present some tax advantages or challenges depending on the type of vehicle purchased and how much that vehicle is used for personal purposes. The depreciation rules governing vehicles can be confusing for tax preparers and clients alike. Below is an overview of the different depreciation rules related to the different classes of vehicles.

Heavy Vehicles

The first category of vehicle would include all heavy general purpose trucks (actual unloaded weight of 13,000 pounds or more). This category includes any vehicle with a VIN number that has the gross vehicle weight of more than 13,000 pounds. Examples would be cement mixing trucks, dump trucks, furniture moving trucks, and delivery trucks. There are no limits on bonus depreciation or Section 179 for purchasing these vehicles.

Cars, Trucks and Vans

The second broad category of vehicles are listed property vehicles, which are defined as automobiles and other forms of transportation property that lend themselves to personal use. Listed property includes passenger automobiles. Passenger automobiles include automobiles when they have an unloaded gross vehicle weight of 6,000 pounds or less. Listed property also includes light vans or trucks with loaded gross vehicle weight rating of under 6,000 pounds. The depreciation limits for these types of vehicles placed in service in 2022 are:

  • $11,200 for the first year without bonus depreciation
  • $19,200 for the first year with bonus depreciation
  • $18,000 for the second year
  • $10,800 for the third year
  • $6,460 for each succeeding year

Additionally, if a truck or van has been specially modified with the result that it is not likely to be used more than a de minimis amount for personal purposes, that vehicle will not be limited for depreciation purposes. For example, a van that has only a front bench for seating, in which permanent shelving that fills most of the cargo area has been installed, that constantly carries merchandise or equipment, and that has been specially painted with advertising or the company’s name, is a vehicle not likely to be used more than a de minimis amount for personal purposes.

SUVs

Another category of listed property are SUVs. SUVs are any four-wheeled vehicle that is designed or which can be used to carry passengers over public streets, roads or highways and is rated between 6,000 and 14,000 pounds gross vehicle weight. These vehicles are eligible to expense under Section 179 for up to $27,000 in 2022 and $28,900 for 2023.

A vehicle that meets one of the exceptions below is excluded from the SUV definition above. This exclusion also means the vehicle is not limited to Section 179 and depreciation can be accelerated when placed in service:

  1. Any vehicle designed for more than nine individuals in seating rearward of the driver’s seat
  2. Any vehicle equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length
  3. Any vehicle that has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield

Many  SUV pickup trucks over 6,000 pounds will meet the second exception above as long as they have a cargo box area of at least six feet not readily accessible from the passenger compartment.

Bonus Depreciation vs. Section 179

Bonus depreciation on assets placed in service during 2023is 80% of the total cost of the property. Also consider that some states (including Virginia) have significant addbacks for bonus depreciation in the year placed in service, which do not necessarily apply for Section 179.

Section 179 depreciation can also be limited. For 2023, you can expense up to $  $1,160,000 of eligible property. However, if you spend more than $2,890,000on qualifying property, your deduction will be reduced on a dollar-for-dollar basis. Furthermore, Section 179 deductions are also limited by taxable income and cannot be used to create an operating loss.

Conclusion

As you can see, from a depreciation standpoint, the decision as to what kind of vehicle to buy can weigh on a taxpayer (pun intended).  If you have questions regarding what type of company vehicle to buy, please contact us at 703-385-8888.



Written by Alex Tuvin, CPA:

Alex Tuvin

Alex Tuvin is a tax supervisor at Thompson Greenspon and joined the firm in 2014. In December 2019, Alex left his position with Thompson Greenspon due to moving out of the greater Washington, DC area but returned to the firm in December 2021. He works in the government contracting, professional services and construction & real estate industries. His experience includes the review of Federal and multi-state tax returns and assisting his clients with tax planning throughout the year at both the business and individual level to help them prepare for the future.

He has been working as a tax accountant since graduating from the University of Maryland in 2010 with a Bachelor of Science degree in Accounting. He is a Certified Public Accountant licensed in the states of Virginia and Maryland.

Outside of work, Alex served on the Board of Directors for his alma mater high school, the Charles E. Smith Jewish Day School, in Rockville, MD from 2018-2020. Away from the office, Alex enjoys spending time with his growing family.


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