If you claim the depreciation of company vehicles as a tax write-off, beware. Tax laws regarding vehicle depreciation have changed drastically. Many business owners have dedicated company vehicles. This has historically been a good decision because it streamlines the process of claiming vehicle depreciation and other transportation expenses on your return. However, IRS regulations regarding vehicle depreciation are changing in ways that may or may not be beneficial to the small business owner.
The Protecting Americans From Tax Hikes Act of 2015 and Your Business
If you bought a passenger vehicle this year for business use, the amount you can claim as depreciation has been revised. In 2015, business owners could claim 50% depreciation up to $11,160 for cars and $11,460 for trucks and vans placed in service in the past year. In 2016, cars are worth $3,160 in the first year, $5,100 in the second year, and successively smaller amounts in forthcoming years. Vans and trucks are still subject to a $11,160 credit in the first year but also eligible for other credits in future years. In other words, automobiles have their depreciation credit spread out over several years rather than claiming the depreciation all in one chunk.
Leasing Vehicles: Pros and Cons
As the depreciation limits have been lowered for vehicles that are bought, many business owners may be tempted to lease instead. Whether this is truly better for your business depends on your unique situation. Bonus depreciation may not apply to leased vehicles; the limits on the amount you can write off are far lower in this case. For those that qualify for bonus depreciation, however, the limits are actually higher than for purchased vehicles. There are tables under Regs. Sec. 1.280F-7 that can give you the exact amount that is deductible for leased vehicles of various types and prices.
How Does This Affect You?
Many business owners can pay for much of the cost of a company vehicle or at least heavily defray the costs with the tax breaks associated with these expenses. While the above mentioned numbers may still seem generous, keep in mind that these are the maximum amounts. There are complicated schedules and formulas that will determine how much you can claim for depreciation in your unique situation. If you are considering adding new vehicles to your fleet this year, the changes may make a difference in whether and how you choose to do so. Talking to an accountant is important if tax benefits are a serious part of your decision-making process in whether to buy, lease, or forgo both. Does this seem confusing? New laws are adding multiple layers of complexity to a subject that already requires expert analysis. Maintaining a vehicle dedicated solely to business activities and writing off the depreciation is still a good financial decision for most small businesses. An experienced accountant can help you make sure that you maximize your write-offs while staying on the right side of new laws and regulations.