New Law Affects Automobile Depreciation

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The 2017 Tax Cuts and Jobs Act (TCJA), enacted in December 2017, contains several provisions that will affect depreciation on cars and other vehicles used in a trade or business.


The entire cost of a vehicle with a gross vehicle weight rating (GVWR) over 6,000 pounds may now be deducted in a single year as a result of the increase in the bonus depreciation rate from 50% to 100%. The 100% bonus applies to vehicles acquired and placed in service after September 27, 2017.


Since most states don't allow bonus depreciation, vehicles that are fully deducted in the first year for federal purposes may still be depreciated over several years on state returns. New York State and New York City also limit depreciation and section 179 for SUVs over 6,000 pounds.


Depreciation claimed on vehicles with a GVWR of 6,000 pounds or less remain subject to the annual depreciation caps known as the "luxury automobile rules." These caps were substantially increased by TCJA for vehicles placed in service in 2018 or later. For example, the first year cap is now $18,000 when bonus depreciation is claimed. That cap would have been only $11,060 for the same vehicle placed in service in 2017 - even it was acquired after September 27, 2017, and is eligible for the 100% bonus.


Other annual caps were nearly tripled. For example, annual depreciation caps for passenger cars weighing 6,000 pounds or less were increased to $16,000 in the second year, $9,600 in year three, and $5,750 thereafter. Before 2018 those limits were only $5,700, $3,450, and $2,075 respectively.


As we reported in TCJA Alert #16, changes to the like-kind exchange rules under TCJA create immediate tax consequences when a vehicle is traded in for a newer model. Since the like-kind rules now apply only to exchanges of real property, taxable gain is recognized when the trade-in allowance on a vehicle exceeds its adjusted basis (its cost reduced by any depreciation taken). On the other hand, if the basis exceeds the trade-in allowance, a loss may be recognized.


TCJA made sweeping changes to tax law. Call your LM Cohen professional if you have questions about vehicle depreciation or other aspects of the law.


All of our prior Tax Cuts and Jobs Act Alerts are available for you to view on the Updates page of our website.

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