Important Business Vehicle Use Tax Changes

The tax reform law passed by Congress and signed into law by the President has changed many previously existing rules, including the way that business vehicles are taxed and written off. Though businesses are still able to choose between whether to use actual expenses and vehicle depreciation or to opt for the standard mileage rate as a write-off, one of the most notable changes to be made was a significant increase in the limit to the luxury auto depreciation.

Other changes include:

• Increases to the standard mileage rate for a car, van, pickup or panel truck that is used for business, as shown below.

The standard mileage rate cannot be used by companies whose business vehicles are for hire or who are writing off business expenses for more than four vehicles at the same time, and is only of use for those who have always used the standard mileage rates: if your company has previously opted for the actual expense method using Sec. 179, bonus depreciation and/or MACRS depreciation, you will need to continue to do so for that vehicle.

• For those using the actual expense method, the Tax Cuts and Jobs Act introduced a higher depreciation limitation for passenger autos being used for business purposes. Actual expense means that taxpayers can keep track of all of the real costs that are incurred to operate the vehicle during the tax year. This can include everything from the price of fuel, oil, repairs, registration and insurance, as well as depreciation. Using the actual expense method can definitely work to your advantage if gas prices go up, and the higher depreciation limits and the extension and expansion of bonus depreciation makes it particularly beneficial, especially in the first year that a vehicle is being used. The disadvantage of using the method is that anybody who uses the car for both business and personal purposes needs to keep records of both and make sure to properly allocate the correct amount for each.

• The tax reform act boosted the amount of depreciation that taxpayers could take on their vehicles, particularly for more expensive vehicles during the first and second year that they are in use. Also known as the “luxury auto” rule, the new guidance means that vehicles that were put into service in 2017 and 2018 will be able to depreciate more than previously, and that those numbers will continue to increase in the years that follow based on inflation.

• Beyond the luxury auto rule, the new law also added a 100% bonus depreciation that taxpayers are able to add on their first-year-in-use auto rates. That increase is $8,000, though vehicles that have been purchased before September 28, 2017 but that were not actually put into service until tax year 2018 will only get the benefit of a $6,400 depreciation cap, and for 2019 that number drops to $4,800.

• If you are a self-employed taxpayer, you now have the ability to deduct the business use portion of any interest that you pay throughout the tax year on the interest you pay on your auto loan. This deduction would be taken on Schedule C, unless the loan was a consumer loan.
  
  
• In previous years business owners were smart to trade in a business vehicle if selling it would result in a gain: doing so deferred the gain into the new vehicle for which it was traded, thus eliminating the need to pay any taxes on the gain. Likewise, if a vehicle’s sale would result in a loss, it would make sense to do so and take the tax loss. Those options are no longer available under the tax reform act – only real estate is still eligible for tax-deferred exchanges. This means that whether an owner sells a vehicle outright or chooses to trade it in, the transaction is categorized as a sale, with gains being taxable and losses being deductible. The only exception is that if a vehicle is used solely for personal purposes and its sale represents a loss, that loss is not deductible, while those vehicles that are used for business and personal purposes are permitted to deduct the losses that are related to the business.
  
  
• Where employees were previously permitted to deduct their expenses related to the business use of their vehicle, ranging from gasoline to repairs to registration, that is no longer permitted. Now only businesses are able to deduct vehicle business expenses.

If you’d like more information or professional help in handling business vehicle expenses on your taxes, contact an accounting professional.


Jon Osborn, EA writes for CountingWorks, an accounting news and advice website. Reach his office at [email protected].  

 

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