Do you know how the new tax law affects the depreciation of vehicles? If you use a car, truck, or another vehicle for work, you need to know how this listed property should appear on your taxes. Doing your taxes correctly means you won't run into problems with the IRS later on. However, it can seem difficult to do your taxes right when the rules are changing.
How will the new tax law affect you? Do you need to do your taxes differently next year? Are these changes good or bad? In this guide, we'll answer all these questions and more to clear up your confusion. Keep reading to learn what you need to know about automobile depreciation and taxes!
What Is The Depreciation Of Vehicles?
Anything valuable that wears down gradually with use will "depreciate." Unlike a house, which often goes up in value as its area becomes more desirable or as changes are made, cars always go down in value. They age and wear out with time, which is why an older car is always worth less than a newer car (of course, things are a bit different with rare or collectible vehicles).
However, depreciation is used mainly for accounting purposes- it doesn't always precisely reflect the actual wear on a car. The rate of depreciation varies depending on the vehicle's year, model, and make. Cars depreciate the most in the first year of ownership when they go from "new" to "used" status.
Within the first five years of car ownership, the car tends to lose about 60 percent of its purchase price to depreciation. Twenty percent of that value is lost in the first year alone. Clearly, depreciation affects the decision to buy and sell new and used cars but, it also affects the way vehicles can be claimed on taxes since it affects the value of the vehicle itself.
The New Depreciation Rules
So, what has changed when it comes to the depreciation of vehicles this year? In late 2017, the Tax Cuts and Jobs Act was unveiled. This was the most comprehensive tax reform plan Americans had seen in decades. Although learning the new ropes might seem like a challenge, a lot of these changes are actually great for entrepreneurs and small business owners.
One of these positive changes was depreciation breaks for the first year of vehicle ownership. The depreciation allowances for business vehicles were also made bigger than before. Any new or used vehicles that were put into service after the end of 2017 and used for business more than half the time, got those depreciation allowance increases.
If your business vehicle was put into service anytime in 2018, you get a maximum depreciation allowance of $10,000 for the first year. In the second year, the maximum is $16,000, and in the third year, the maximum is 9,600. Finally, the maximum for the fourth year and every year after that is $5,760. However, if the vehicle isn't just used for business, those allowances get reduced.
First-Year Depreciation Bonus
In addition to that, you can claim first-year bonus depreciation if your work vehicle was put into service anytime from September 28, 2017, to December 31, 2017. The maximum depreciation allowance gets increased from $10,000 to $18,000 for the first year if you claim this bonus. However, this doesn't apply to used vehicles that you or your business were using before.
The vehicle doesn't have to be brand-new, but it should be new to you or your company. That bonus depreciation value will only be in effect until 2026, as long as Congress doesn't make a change. According to the previous law, bonus depreciation didn't apply to any used vehicles, so this is a great benefit to business owners who don't want to spend on brand-new cars.
For trucks including pickups, heavy SUVs, and vans, there is an unlimited 100 percent first-year depreciation bonus. This applies to vehicles that were put into serviced between September 28, 2017, and December 31, 2017. Again, this applies to used vehicles, but not if they were previously used by you or your company.
Before, the first-year bonus depreciation was 50 percent, and it didn't apply to used trucks, either. As long as you use the truck more than 50 percent for business needs, this 100 percent bonus depreciation can bring you huge tax savings. Why is this so different from other types of cars? Trucks are treated according to the tax law as transportation equipment, not passenger vehicles.
That's why they can get the 100 percent bonus depreciation in the first year.
How Heavy Vehicles Are Defined
This 100 percent bonus doesn't apply to every truck, van, or SUV. It only works when the gross vehicle weight rating or GVWR is over 6,000 pounds. To figure out the GVWR of a vehicle, check the manufacturer's label, typically found inside the door on the driver's side. A car salesman may not know the GVWR, so it's best to check it yourself.
How Does it Work?
Let's give a concrete example of how these numbers will apply when you do your taxes. In 2018, let's say you bought a new heavy pickup truck for $65,000, and use it solely for business purposes. When you do your 2018 taxes, you'll be able to deduct 100 percent of the purchase price, or $65,000. That's thanks to the 100 percent bonus depreciation break for the first year.
However, if you only use the vehicle for business a percentage of the time, you'll only be able to deduct that percentage of the purchase price on your taxes. The same rules apply to both used and new vehicles.
Are You Prepared For Your Business Taxes?
Doing taxes as a small business owner can be daunting, especially in the first few years. You need to know about the depreciation of vehicles and many other deductions and claims as well. However, it's worth your while to learn how to do your taxes right. If you don't understand all the deductions you're eligible for, you could be losing money every year.
For more business-related financial tips, check out this article on legal requirements for paystub records.
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