Can a Business Fully Deduct a “Luxury” Vehicle?
The Internal Revenue Service provides criterion and regularly updated tables as guides for business vehicle deductions. The deductibility of a vehicle used for business purposes is subject to various limitations and rules. The examples below illustrate the depreciation of a luxury vehicle for tax purposes. It does not include section 179 deductions or special depreciation.
Vehicle Depreciation Under Section 280F
Under section 280F, it would take 6 years to fully recover the cost of a non-luxury vehicle with a 5-year useful life. Per the updated tables (the chart without the additional first-year depreciation deduction), the depreciation allowed is only $16,935. That equals 6 tax years with the first $3,160, then $5,100, then $3,050, followed by $1,875 for the remaining 3 tax years. In other words, a vehicle costing $16,935 is fully deductible through depreciation after 5 years of use. If the vehicle’s costs exceed $16,935, an unrecovered basis will still remain after 5 years of use. The owner can use the vehicle but is allowed only $1,875 in depreciation each year.
A “luxury” vehicle, is a 5-year vehicle that cost more than the depreciation limits. It hasn’t fully depreciated in the 6 tax years. It can be fully depreciated for book purposes but must be kept operable until the remaining cost is deducted. The cost must be deducted at $1,875 depreciation per year to be fully deductible for tax purposes. Essentially, a $30,000 vehicle would take 13 tax years to fully deduct.
A CPA can provide guidance in navigating through the rules so costly and time-intensive decisions are minimal or completely avoided. CPA firms can also create tables and calculations to document the amounts and values that are deductible. Lastly, a CPA offers invaluable expertise and experience that can make the difference between a headache and a great night’s rest.
Contributed by Maryney Ramirez