2020 Last-Minute Vehicle Purchases to Save on Taxes-Part 1 of 5

by | Dec 1, 2020 | Business Deductions | 0 comments

If you need a replacement vehicle, whether it’s a car, SUV, van or truck and/or need tax deductions in 2020, read on. Thanks to the Tax Cuts and Jobs Act (TCJA) tax reform, you could, in many cases, deduct up to 100% of the cost in 2020.

But the timing has to be right. If you want the deduction, you need to: 1) own the vehicle, and 2) place it in business service on or before Dec. 31, 2020. Place it in service means you must have at least 1 business mile recorded in 2020.

These rules can be complicated but here are some short descriptions of deductions available for 4 types of vehicles.

Choice 1 – You want to buy a new or used SUV Crossover Vehicle or Van

This will give you 4 big benefits:

  1. You will have the ability to elect bonus depreciation of 100% (thanks to TCJA)
  2. You will have the ability to select Section 179 expensing of up to $25900
  3. You will be able to use MACRS depreciation using the 5 year table
  4. There are no luxury limits on vehicle depreciation deductions

Caution: Taking the full depreciation now means you won’t have it in future years when your income might be higher. So, though the 100% deduction is available, you could also depreciate a lesser amount by choosing a Section 179 deduction and taking the remainder of the depreciation over 5 years. One of the big advantages of depreciation is its flexibility.

As an example, we had a client once that bought a new vehicle and then suffered a business setback (in the same year) and had cash flow problems. He wrote off the entire vehicle that year and ended up with a $12,000 tax refund which put him back in the black in short order.

Choice 2 – You want to buy a new or used pickup

This newly purchased qualifying pickup placed in service before Dec. 31, 2020 can give you 4 similar benefits.

  1. Bonus depreciation of up to 100 percent
  2. Section 179 of up to $1,040,000 (special rules for qualifying for this much depreciation)
  3. MACRS depreciation using the 5 year table
  4. No luxury limits on vehicle depreciation deductions

Choice 3 -You Want to Buy a New or Used Qualifying Cargo or Passenger Van

Again, there can be 4 benefits for a qualifying purchase if placed in service before Dec. 31,2020

  1. Bonus depreciation of up to 100 percent
  2. Section 179 expensing of up to $1,040,000
  3. MACRS depreciation using the 5 year table
  4. No luxury limits on vehicle depreciation deductions

The van must qualify as a cargo van to receive the above benefits

Choice 4 – You Buy a Depreciation-Limited New or Used Car

If you or your corporation buys and places in service a new or used passenger vehicle such as a car, pickup, SUV or van with a GVWR of 6000 lbs or less by Dec. 1, 2020 then you or your corporation may claim up to $8,000 in bonus depreciation.

The TCJA increased the luxury passenger vehicle depreciation limits and also indexed them for inflation. The 2020 limits are

  1. $10,100 for the first taxable year in the recovery period
  2. $16,100 for the second taxable year in the recovery period
  3. $9,700 for the 3rd taxable year in the recovery period
  4. $5,760 for each succeeding year in the taxable period

Planning point – if you want the big deductions, forget the depreciation-limited vehicles

Takeaways

The TCJA made it much easier to find big deductions on your new or used vehicle purchase.

If your purchase has a GVWR greater than 6,000 lbs, then you can write off up to 100% of the business cost with bonus depreciation if you both buy it and place it in service before the end of the year.

If your purchase has a GVWR of 6,000 lbs or less, then with a purchase price of $58,100 or more, you can write off up to $18,100 in 2020 if you buy it and place it in service before the end of the year.

NOTE: Depreciation rules are complicated and very specific to the type of vehicle, weight, date purchased, etc. Be sure to review potential purchases with a tax advisor if you are depending on vehicle depreciation deductions in your financial planning. And again, if you want a 2020 deduction, the vehicle must be purchased and placed in service before Dec. 31, 2020.

This is one in a series of 2020 last minute tax deductions or your business.

AFS – your small business tax specialist