The Tax Cuts and Jobs Act (TCJA) made several changes to the automobile provisions, which results in various increased benefits for business owners. One of the beneficial changes from the new law is the rise in the allowable depreciation of automobiles. Like the prior law, passenger automobiles are subject to annual dollar caps on allowable depreciation. However, the new provisions significantly increased the caps on depreciation limits for passenger vehicles acquired and placed in service after December 31, 2017 and before January 1, 2027. The act also extended the $8,000 increase in the first-year depreciation in which bonus depreciation is elected for qualified property acquired and placed in service after September 27, 2017 and prior to January 1, 2027.
If the taxpayer doesn’t take bonus depreciation, the allowable annual deductions are as follows:
- $10,000 for the first year (pre-TJCA $3,160)
- $16,000 for the second year (pre-TJCA $5,100)
- $9,600 for the third year (pre-TJCA $5,100)
- $5,760 for each succeeding taxable year (pre-TJCA $1,875)
If the taxpayer claims 100% bonus depreciation, the allowable annual deductions are as follows:
- $18,000 for the first year (pre-TJCA $11,160)
- $16,000 for the second year (pre-TJCA $5,100)
- $9,600 for the third year (pre-TJCA $5,100)
- $5,760 for each succeeding taxable year (pre-TJCA $1,875)
These allowances will be adjustable for inflation for vehicles placed in service after December 31, 2018.
If the passenger vehicle is not used 100% for business, the allowable deduction is reduced proportionally based on the percentage of personal use versus business use.
For passenger automobiles built on truck chassis (qualifying trucks and vans) the IRS provides a different indexing component which generally results in slightly higher limits. Presumably the use of the differing index factor will continue with the new rules when determining the automobile price inflation adjustments for these types of vehicles placed in service after calendar year 2018.
The TCJA also increased the allowable first-year bonus depreciation to 100% (instead of 50%, as under prior law) for heavy SUVs, pickups, and vans that are used greater than 50% for business. This is available for assets placed in service between September 27, 2017 and December 31, 2022. Heavy sport utility vehicles and other heavy vehicles continue to be subject to a $25,000 Section 179 limit on a per-vehicle basis adjustable for inflation, which will begin after calendar year 2018.
One downfall to the change in auto rules from the TCJA is the elimination of employee deductions for unreimbursed vehicle expenses. Under the prior law, taxpayers could claim an itemized deduction for total unreimbursed business use vehicle expenses subject to a 2% of adjusted gross income threshold for miscellaneous itemized deductions. Beginning January 1, 2018 through December 31, 2025, the new law eliminates the miscellaneous itemized expenses that were subjected to the 2% of adjusted gross income threshold under prior law. Thus, for years 2018 through 2025, taxpayers can no longer claim deductions for unreimbursed business use vehicle expenses.
Overall, these enhanced auto allowances provide more acceleration options for deducting expenses. If you need assistance or have any questions regarding how the new automobile rules impact you and your business, please contact us.
**All blog posts are valid as of the date published.
