You might be asking yourself if you can apply a vehicle deduction for your 2017 tax bill if purchased before year end. We advise to not make a purchase without first looking at what your 2017 deduction would be. You’d also need to see whether tax reform legislation could affect the tax benefit of a 2017 vs. 2018 purchase.
Buying a vehicle for business, new or used, may be eligible for Section 179 expensing. This will allow you to immediately deduct, rather than depreciate over a period of years, some or all of the vehicle’s cost. But the size of your 2017 deduction will depend on several factors. One is the gross vehicle weight rating.
The normal Sec. 179 expensing limit generally applies to vehicles with a gross vehicle weight rating of more than 14,000 pounds. The limit for 2017 is $510,000, and the break begins to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $2.03 million.
But a $25,000 limit applies to SUVs rated at more than 6,000 pounds but no more than 14,000 pounds. Vehicles rated at 6,000 pounds or less are subject to the passenger automobile limits. For 2017, under current law, the depreciation limit is $3,160. And the amount that may be deducted under the combination of Modified Accelerated Cost Recovery System (MACRS) depreciation and Sec. 179 for the first year is limited under the luxury auto rules to $11,160.
In addition, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and non-deductible personal use. The depreciation limit is reduced if the business use is less than 100%. If the business use is 50% or less, you can’t use Sec. 179 expensing or the accelerated regular MACRS; you must use the straight-line method.
If tax reform legislation is signed into law and it will cause your marginal rate to go down in 2018, then purchasing a vehicle by December 31, 2017, could save you more tax than waiting until 2018. Why? Tax deductions are more powerful when rates are higher. But if your 2017 Sec. 179 vehicle deduction would be reduced or eliminated because of the asset acquisition phaseout, then you might be better off waiting until 2018 to buy.
Also be aware that tax reform legislation could affect the depreciation limits for passenger vehicles, even if purchased in 2017.
These are just a few factors to look at. There are many additional rules and limits regarding company car tax benefits. So if you’re considering a buying a vehicle for business, contact us to discuss whether it would make more tax sense to buy this year or next.