Did your small business purchase a vehicle this year? If so, you need to know about recent changes in bonus depreciation before you file your taxes.
New Rules from the Tax Cuts and Jobs Act
In December 2018, Congress passed the Tax Cuts and Jobs Act, with changes to business tax code that included some exciting opportunities for small businesses to save. If your business purchased a vehicle, you may be able to claim the new 100 percent first-year bonus depreciation deduction. The previous deduction was 50 percent, so the increase to 100 percent is a huge opportunity to save and reinvest in your business.
With straight-line depreciation, businesses spread out the cost of long-term assets over the entire life of the asset. Bonus depreciation is an incentive that allows businesses to accelerate depreciation and save more when an asset is first purchased. This stimulates the economy by enabling purchases that businesses might have otherwise waited to make. Bonus depreciation is a valuable tool for businesses to reduce their tax bills.
What Vehicles Qualify for 100% Bonus Depreciation?
The 100 percent bonus depreciation rule applies to heavy SUVs, trucks, and vans that are used more than 50% for business purposes. New and used vehicles can qualify, but the law requires that the vehicle be new to you and your business. Under the previous law, bonus depreciation was not allowed for used vehicles.
100% first-year bonus depreciation is only available when an SUV, pickup, or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. Examples of suitably heavy vehicles include the Audi Q7, Buick Enclave, Chevy Tahoe, Ford Explorer, Jeep Grand Cherokee, Toyota Sequoia, and lots of full-size pickups.
For passenger vehicles, the law also increases first-year bonus depreciation from 10,000 dollars to 18,000 dollars. The maximum allowance then drops to 16,000 dollars in year two and 9,600 in year three. After year three, the maximum allowance drops to 5,760 dollars per year until the vehicle is fully depreciated.
Take Action While You Can
Like most good things, 100 percent bonus depreciation will not last. The plan is set to apply to purchases made between September 17, 2017, and January 1, 2023. After then, bonus depreciation drops to 80 percent in 2024 and phases out to zero by January 2027. Small business owners have a limited window of time to invest in their businesses and capitalize on this opportunity. So don’t wait. Act now.
Sources: IRS, Marketwatch, The Balance SMB