Vehicle Purchases to Save on Taxes

Here's an easy question Do you need more 2024 tax deductions? If the answer is yes, continue reading. 

Next easy question: Do you need a business vehicle?

If so, you can simultaneously solve or mitigate the first problem (needing more deductions) and the second problem (needing a replacement vehicle) if you can get your replacement vehicle in service on or before December 31, 2024. Don’t procrastinate. 

To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile on or before December 31, 2024. 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, 2024, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four benefits: 

1. Elect bonus depreciation of 60 percent
2. Elect Section 179 expensing of up to $30,500.
3. Elect MACRS depreciation using the five-year table.
4. Avoid the luxury limits that cap vehicle depreciation deductions.

Example. You buy a $100,000 heavy SUV, which you will use 90 percent for business use. Your write-off will look like this:

• $30,500 in Section 179 expensing
• $35,700 in bonus depreciation
• $4,760 in 20 percent MACRS depreciation, or $1,190 if the mid-quarter convention applies because you placed more than 40 percent of your MACRS assets in service in the final quarter of the year

So the 2024 write-off on this $90,000 (90 percent business use) SUV can be as high as $70,960 ($30,500 + $35,700 + $4,760).

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, 2024, then this newly purchased vehicle gives you four big benefits: 

1. Bonus depreciation of up to 60 percent
2. Section 179 expensing of up to $1,220,000
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have

• a GVWR of more than 6,000 pounds, and
• a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Example. You pay $55,000 for a qualifying pickup truck that you use 91 percent for business. You can use Section 179 to write off your entire business cost of $50,050 ($55,000 x 91 percent). 

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 expensing of up to the $30,500 SUV expensing limit and 60 percent bonus depreciation. (See the example above for how the SUV treatment works.)

3. Buy a New or Used Qualifying Cargo Van 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, 2024, can qualify for four big tax benefits:

1. No luxury limits on the vehicle
2. Bonus depreciation of 60 percent
3. Section 179 expensing of up to $1,220,000
4. MACRS depreciation using the five-year table

Cargo Van

To qualify for either 60 percent bonus depreciation or up to $1,220,000 in Section 179 expensing, the cargo van must have

• a GVWR of more than 6,000 pounds,
• a fully enclosed driver compartment separate from the load-carrying area,
• no seating behind the driver's seat, and
• no body section that protrudes more than 30 inches ahead of the leading edge of the windshield.

If the van passes the GVWR test but fails one of the other qualifying tests listed above, the law deems it an SUV instead.

Passenger Van

If the van has a GVWR greater than 6,000 pounds and seats more than nine people behind the driver's seat, tax law defines it as a passenger van, not an SUV, and it qualifies for Section 179 expensing of up to $1,220,000 and 60 percent bonus depreciation.

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 60 percent bonus depreciation, as explained in Section 1, Example 1 above.

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 with a curb weight of 6,000 pounds or less (or a pickup, an SUV, or a van with a GVWR of 6,000 pounds or less) on or before December 31, 2024, 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 2024 luxury depreciation limits are?

• $12,400 for the first taxable year,
• $19,800 for the second taxable year,
• $11,900 for the third taxable year, and
• $7,160 for each succeeding year.

Mid-quarter trouble. There's the possibility that you will 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 passenger vehicle is not permitted to exceed the depreciation limit. This means Section 179 deductions are useless on autos and other vehicles that fall into the luxury depreciation-limited category.

5. Buy an Electric Vehicle

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. You take the credit first, and then follow the rules that apply to the vehicle you purchased.

If you would like to discuss these vehicle strategies and more, please request a callback on my direct line at 925-308-0040.

Sincerely,

David Ordaz

Enrolled Agent