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Changes contained in the recent Tax Cuts and Jobs Act will allow many companies to write off the cost of vehicles used in their businesses over a much shorter period.

The tax code generally allows companies to recover the cost of a vehicle by taking depreciation deductions over a six-year period, beginning in the year the vehicle is placed in service. In most cases, these depreciation deductions are highest in the early years of the period and taper off in the later years.

Some vehicles qualify for additional bonus depreciation, which allows a larger deduction in the year the vehicle is placed in service. For an eligible vehicle placed in service in 2017, the amount of the bonus depreciation deduction was 50% of the adjusted basis of the vehicle (subject to a cap for certain vehicles, as discussed below). That amount reduced the vehicle's basis for purposes of calculating regular depreciation deductions allowable in 2017 and later years.

Historically, bonus depreciation has been available only if the original use of the vehicle begins with the company — meaning only new vehicles would qualify.

Congress has long been concerned that there is an element of personal consumption with the business use of cars, particularly higher-end cars. To limit this perceived benefit, the tax code places annual caps on the amount of depreciation deductions (both regular and bonus) that a company otherwise could take. These caps have the effect of stretching out the recovery period.

Passenger automobiles subject to these caps are defined broadly to include most four-wheeled vehicles that are manufactured primarily for use on public streets, roads, and highways, and are rated at no more than 6,000 pounds unloaded gross vehicle weight.

Although the annual caps theoretically are aimed at luxury cars, the caps historically have been so low that a taxpayer could not fully recover the cost of even a modest car over the normal six-year period. For example, a company that placed a passenger auto in service in 2017 could deduct no more than $3,160 of depreciation in 2017, plus an additional $8,000 if the company took bonus depreciation. The cap in later years would be $5,100 in 2018, $3,050 in 2019, and $1,875 in 2020 and all subsequent years. Over the six-year period, the company therefore could recover no more than $16,935 of the cost of the auto, or $24,935 if the company took bonus depreciation. (Due to inflation calculations, slightly higher limits applied to trucks and vans.)

Tax reform makes the depreciation rules for business vehicles more generous.


Click here to read the full article in Crain's Cleveland Business.
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