2023 Last-Minute Vehicle Purchases to Save on TaxesTax Planning
- Do you need a replacement business car, SUV, van, or pickup truck?
- Do you need tax deductions this year?
- Do you need a tax credit to offset what you owe to the IRS?
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 full business cost of certain vehicles, 89 percent of other vehicles, and up $20,200 for other vehicles.
If you plan on purchasing an electric vehicle or a plug-in hybrid electric vehicle, you may qualify for a tax credit of up to $7,500.
Get the Timing Right
Don’t procrastinate. If you want the vehicle deduction and/or the tax credit, you need to
- own the vehicle, and
- place it in business service
on or before December 31, 2023.
To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile on or before December 31, 2023. 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 Heavy New or Used SUV, Crossover Vehicle, or Van
Let’s say that on or before December 31, 2023, 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 that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you the ability to
- elect bonus depreciation of 80 percent thanks to the TCJA;
- elect Section 179 expensing of up to $28,900;
- elect MACRS depreciation using the five-year table; and
- avoid the luxury limits that cap vehicle depreciation deductions.
Key point. Bonus depreciation applies to both new and used vehicles and other property, thanks to the TCJA.
To obtain the largest deduction on the heavy SUV, do this in the order described below:
- Claim Section 179 expensing.
- Claim bonus depreciation. (Note: This is automatic unless you elect out.)
- Claim MACRS depreciation.
Example 1. You buy a $100,000 heavy SUV, which you will use 90 percent for business use. Your write-off will look like this:
- $28,900 in Section 179 expensing
- $48,880 in bonus depreciation
- $2,440 in 20 percent MACRS depreciation, or $611 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 2023 write-off on this $90,000 (90 percent business use) SUV can be as high as $80,220 ($28,900 + $48,880 + $2,440).
If you don’t want 80 percent bonus depreciation in 2023, you can elect out of it.
Example 2. On or before December 31, 2023, you buy and place in service a $53,900 qualifying SUV for which you can claim 100 percent business use. If you elect out of bonus depreciation and elect $28,900 in Section 179 expensing instead, your maximum 2023 write-off for the cost of the SUV is either $33,900 or $30,150, computed as follows:
- $28,900 in Section 179 expensing, plus
- $5,000 in MACRS depreciation (20 percent x $25,000)—or $1,250 in MACRS depreciation if the midquarter convention applies.
From what we’ve seen, almost all SUVs, crossover vehicles, and vans with a GVWR of 6,001 pounds or more qualify as trucks for purposes of both 80 percent bonus depreciation and the up-to-$28,900 Section 179 expensing election.
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, 2023, then this newly purchased vehicle gives you four big benefits:
- Bonus depreciation of up to 80 percent
- Section 179 expensing of up to $1,160,000
- MACRS depreciation using the five-year table
- 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 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 $28,900 SUV expensing limit and 80 percent bonus depreciation. (See Example 1 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, 2023, can qualify for four big tax benefits:
- No luxury limits on vehicle
- Bonus depreciation of 80 percent
- Section 179 expensing of up to $1,160,000
- MACRS depreciation using the five-year table
Key point. You can use Section 179 to write off 100 percent of the business cost of qualifying cargo and passenger vans.
To qualify for either 80 percent bonus depreciation or up to $1,160,000 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.
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 $1,160,000 and 80 percent bonus depreciation.
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 80 percent bonus depreciation, as explained in Example 2 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 (or a pickup, an SUV, or a van with a GVWR of 6,000 pounds or less) on or before December 31, 2023, 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 2023 luxury limits are
- $12,200 for the first taxable year,
- $19,500 for the second taxable year,
- $11,700 for the third taxable year, and
- $6,960 for each succeeding year.
Key point. The limits described above are annual. If you choose bonus depreciation, your maximum first-year deduction is $20,200 on a depreciation-limited vehicle. The ceilings listed above do not come into play if you spend $69,000 or less and use bonus depreciation ($61,000 with no bonus depreciation).
Mid-quarter trouble. And then there’s 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 and go for the vehicles such as the heavy SUVs and pickup trucks.
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. But the newly enacted Inflation Reduction Act thoroughly revamped the credit beginning August 17, 2022,
with additional changes taking place in 2023 and more coming in 2024.
If you are planning to take advantage of this credit, there’s much to know. See Tax Credits for Electric Vehicles: The Latest from the IRS and pay particular attention to the section titled, “Purchasing an EV for Business Use.”
The TCJA made it much easier to find big last-minute deductions on your new or used vehicle purchases:
- If your new or used vehicle has a GVWR greater than 6,000 pounds, then you can write off more than 80 percent of your business cost using Section 179 expensing, 80 bonus depreciation, and MACRS depreciation if you both buy it and place it in service on or before December 31, 2023.
- If your new or used vehicle has a GVWR of 6,000 pounds or less and has a purchase price of $69,000 or more, then you can write off up to $20,200 in 2023 if you buy it and place it in service on or before December 31, 2023 (assuming the mid-quarter convention does not apply).
Don’t forget to follow our recommendation and drive your new vehicle for at least one business mile on or before December 31, 2023, 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.