If you answered yes to any of these questions, you need to examine this article and get ready to smile.
Thanks to the Tax Cuts and Jobs Act (TCJA), you can write off the cost of a vehicle purchase in 2022—including, in many cases, up to 100 percent of the cost—faster than ever before.
And if you plan on purchasing an electric car or a plug-in hybrid electric vehicle, you may qualify for a tax credit of up to $7,500.
Get the Timing Right
Donʼt procrastinate. If you want the vehicle deduction and/or the tax credit, you need to:
To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile on or before December 31, 2022. In other words, you want to both own and drive the vehicle to ensure that it qualifies for the big deductions.
Now that you have the basics, let’s get to the tax deductions.
1. Buy a New or Used SUV, Crossover Vehicle, or Van
Let’s say that on or before December 31, 2022, you or your S corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and has a Gross Vehicle Weight Rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you the following:
Yes, you read that right: bonus depreciation applies to both new and used property, thanks to the TCJA tax reform.
Example 1:On or before December 31, 2022, you buy and place in service a used $50,000 qualifying SUV for which you can claim 90 percent business use. Your business cost is $45,000 (90 percent x $50,000). Your maximum write-off for 2022 is $45,000.
If you donʼt want 100 percent bonus depreciation in 2022, you can take three steps:
From what we have seen, almost all SUVs, crossover vehicles, and vans with a GVWR of 6,001 pounds or more qualify as trucks for purposes of both 100 percent bonus depreciation and the up-to-$27,000 Section 179 expensing election.
Example 2:On or before December 31, 2022, you buy and place in service a $52,000 qualifying SUV for which you can claim 100 percent business use. If you elect out of bonus depreciation and elect $27,000 in Section 179 expensing instead, your maximum 2022 write-off for the cost of the SUV is either $32,000 or $28,250, computed as follows:
2. Buy a New or Used Pickup
If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2022, then this newly purchased vehicle gives you four big benefits:
To qualify for full Section 179 expensing, the pickup truck must have:
Short Bed:If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, the tax code classifies it as an SUV. That’s not bad. The vehicle is still eligible for either expensing of up to the $27,000 SUV expensing limit or 100 percent bonus depreciation. (See Example 2 above for how the SUV treatment works.)
3. Buy a New or Used Qualifying Cargo or Passenger Van
A new or used cargo or passenger van with a GVWR of more than 6,000 pounds that is bought and placed in service on or before December 31, 2022, can qualify for four big tax benefits:
Cargo Van:To qualify for either 100 percent bonus depreciation or up to $1,080,000 in full Section 179 expensing, the cargo van must have
If the van passes the GVWR test but fails one of the other qualifying tests listed above, the law deems it an SUV instead.
Minivan:Many of the vans that we used to think of as minivans now have GVWRs greater than 6,000 pounds and thus qualify as SUVs for the Section 179 deduction and 100 percent bonus depreciation, as explained in the second SUV example above.
Passenger Van:If the van has a GVWR greater than 6,000 pounds and seats more than nine people behind the driverʼs seat, tax law defines it as a passenger van, not an SUV, and it qualifies for full Section 179 expensing of up to $1,080,000 and 100 percent bonus depreciation.
4. 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 (or a pickup, an SUV, or a van with a GVWR of 6,000 pounds or less) on or before December 31, 2022, 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 2022 limits are:
Key Point:The above limits are annual. If you choose bonus depreciation, your maximum first-year deduction is $19,200 on a depreciation-limited vehicle. The ceilings above do not come into play if you spend $64,000 or less and use bonus depreciation ($56,000 with no bonus depreciation).
Mid-Quarter Trouble:And then thereʼs the possibility that you face the mid-quarter convention, which would grant you only 5 percent MACRS depreciation on the vehicle if you placed it in service during the final quarter of the year. You trigger the mid-quarter convention when you place more than 40 percent of your MACRS assets (other than real property) in service during the final three months of the year.
Section 179 Trouble:Section 179 expensing on a so-called luxury vehicle is not permitted to exceed the depreciation limit. So in effect, Section 179 deductions are useless on vehicles in the luxury depreciation-limited category.
Planning Point:If you want the big deductions, forget the depreciation-limited vehicles.
If you purchase an all-electric vehicle or a plug-in hybrid electric vehicle, you might qualify for a tax credit of up to $7,500. But the newly enacted Inflation Reduction Act has thoroughly revamped the credit beginning August 17, 2022, with additional changes taking place in 2023 and 2024. If you are planning to take advantage of this credit, there is much to know.See Buying an Electric Vehicle? Know Tax Law Changes.
Takeaways
The TCJA made it much easier to find big deductions on your new or used vehicle purchases:
Here is another look:Say you buy and place in service a business SUV with a GVWR of 6,500 pounds and a business cost of $100,000. You can immediately write off $100,000 using bonus depreciation. But if this vehicle were depreciation limited because it failed the weight test, your maximum first-year write-off would be $19,200 (again, assuming the mid-quarter convention does not apply).
Donʼt forget to follow our recommendation and drive your new vehicle for at least one business mile on or before December 31, 2022, to ensure it meets the “placed in service” requirement.
If you purchase a fully electric car or a plug-in Hybrid Electric Vehicle, you may qualify for the maximum $7,500 credit that applies to both business and personal vehicles. You take this credit off the top and depreciate or expense the remainder based on your business use percentage.
As I mentioned last week, it’s that time of the year when you should be thinking strategically about saving some of your hard-earned cash and not giving it away… especially if you need more 2022 tax deductions.
If you need a replacement Business Vehicle, this article is for you! In other words, you want to both own and drive the vehicle to ensure that it qualifies for preferable tax deductions.
If you have questions, need clarity, or need help understanding how to navigate your 2022 Federal Tax situation to help further retain or maximize your financial gains, don’t hesitate to get in touch with us at Morris + D’Angelo. This is our Expertise!
At Morris + D’Angelo, we believe that Tax Optimization is one of the most empowering and responsible things you can do to protect your growing financial assets. Tax optimization looks at a multi-year approach to minimizing tax costs. Tax avoidance is integral to tax optimization.
Parts of this article are published with permission fromBradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo
Daniel frequently provides Media Content via Workshops, Podcasts, and Printed Articles on topics like Bitcoin and Cryptocurrency, Wealth Preservation and Planning, Global Banking, and many other high-level financial topics that serve and demonstrate the Value of our Global Network that should be of interest to those who need Private High-Wealth Services.
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