If you own a car—or a fleet of cars—that you use for business, you should be aware that the IRS released new depreciation limitations for passenger automobiles.
Automobile depreciation is the decrease in value of a vehicle over time. Under certain circumstances, businesses and self-employed individuals may be able to deduct a portion of this cost as a business expense. (The same taxpayers can opt to deduct mileage instead).
Simply put, vehicles are divided into categories such as “passenger auto” or “truck or van,” and each category is assigned a specific depreciation schedule with a set percentage that can be deducted each year. The exact amount of the deduction will depend on the cost of the vehicle, the tax year, and your business’s income.
If you purchased your vehicle, the limits cap your depreciation deduction. If you are leasing it, the limits reduce your lease expense deduction by the same amount as if you had purchased the car.
The new limitations were released on January 18, 2023. They apply to passenger automobiles, including trucks and vans, acquired after Sept. 27, 2017, and placed in service during 2023, for 2023 and each succeeding tax year. The IRS adjusts these limits annually in response to inflation.
When Can You Deduct Depreciation?
In general, any vehicle used for business purposes may qualify for deductions on taxes. This includes cars, trucks, vans, and even motorcycles. However, certain requirements must be met for a vehicle to qualify for deductions:
- The vehicle must be used for business purposes at least 50% of the time. This means that the vehicle must be used primarily for the transportation of people or goods as part of a trade or business.
- The vehicle must be owned by the business or self-employed individual claiming the deductions.
- The vehicle must be used within the United States.
- The vehicle must not be used for hire (e.g., a car rental service)
If the vehicle is used for both business and personal use, the deductions are prorated according to the percentage of the vehicle’s business use. It’s important to note that for both mileage and depreciation deductions, commuting is considered personal, not business, use.
What Types of Vehicles Are Affected?
The new limits apply to passenger automobiles, including trucks and vans, that weigh 6,000 lbs or less unloaded, and to trucks and vans that weigh 6,000 lbs including passengers and cargo. All eligible vehicles should have four wheels and be used primarily on public motorways (in other words, this does not apply to farm, construction, or other heavy equipment).
Cars, SUVs, trucks, and vans with a gross vehicle weight rating (GVWR) of more than 6,000 lbs are exempt from these depreciation limits and lease inclusion amounts. However, they may be eligible for other forms of depreciation.
Depreciation & Bonus Depreciation
Depreciation allows taxpayers to deduct the cost of their vehicle over time. For automobiles, the standard depreciation schedule is five years under the Modified Accelerated Cost Recovery System (MACRS).
Bonus depreciation was introduced in 2017 as part of the Tax Cuts and Jobs Act. It allows taxpayers to take an additional (“bonus”) depreciation deduction the year that the vehicle is placed in service rather than having to spread the write-off over several years. As of 2023, the maximum allowable bonus deduction is $20,200.
Additional First-Year Depreciation
Following are the depreciation limitations for passenger automobiles acquired after September 27, 2017, and placed in service during calendar year 2023, for which the first-year depreciation deduction applies.
|Tax Year||Amount for 2023||Amount for 2022|
|1st tax year||$20,200||$19,200|
|2nd tax year||$19,500||$18,000|
|3rd tax year||$11,700||$10,800|
|Each succeeding year||$6,960||$6,460|
No Additional First-Year Depreciation
Depreciation limitations for passenger automobiles placed in service for calendar year 2023 for which no additional first-year depreciation deduction applies.
|Tax Year||Amount for 2023||Amount for 2022|
|1st tax year||$12,200||$11,200|
|2nd tax year||$19,500||$19,500|
|3rd tax year||$11,700||$11,700|
|Each succeeding year||$6,960||$6,960|
For a complete list of deduction amounts for leased vehicles, please see Rev. Proc. 2023-14.
Need Help Figuring It All out?
Automobile depreciation deductions can make a significant difference to the amount you owe on your taxes. The actual amount, however, can be tricky to figure out as it’s based on a number of factors including your overall business income.
Tonneson can help. Contact our team of expert CPAs for personalized assistance in determining your deductions and maximizing your tax savings.
Contact us at Tonneson + Co today to learn how we can help.
If you’re interested in working with Tonneson + Co, please reach out to us. We look forward to hearing from you!