Luxury Automobile Limitations Defined

Luxury Automobile Limitations Defined

The Luxury Automobile Limitation is the annual limit on the amount of depreciation that can be taken on a luxury car used for business purposes. If the taxpayer doesn't claim bonus depreciation, the greatest allowable depreciation deduction is: $10,000 for the first year, $16,000 for the second year, $9,600 for the third year, and $5,760 for each taxable year later in the recovery period. If the taxpayer does claim bonus depreciation, this is the schedule: $18,000 for the first year, $16,000 for the second year, $9,600 for the third year, and $5,760 for each taxable year later in the recovery period. If you decide your business needs a town car to shuttle important clients to and from the local airport, and you decide to spend $70,000 on something a little upscale because that's how your clients like to feel, the annual deductions will be as follows, if you claim the first-year bonus deduction: $18,000 in the first year, if you claim the bonus deduction $16,000 in year two $9,600 in year three $5,760 for the rest of the depreciable period allowed The new depreciation rules adopted in the TCJA also extend deductions to used vehicles that were purchased and put into use after Sept. 27, 2017, though they have to meet certain requirements to qualify. In both cases, depreciation depends on how much the vehicle was used for business, typically 100% and at least 50%. For luxury passenger vehicles used 100% for business and placed in service between Dec. 31, 2017, and Dec. 31, 2026, the TCJA allows 100% first-year bonus depreciation for qualifying new and used property. One important change is that the TCJA increased the amount of depreciation business owners could take on certain assets by $8,000 in the first year. It also extended and modified bonus depreciation for qualified property purchased after Sept. 27, 2017, and before Jan. 1, 2023, including business vehicles.

Luxury Automobile Limitations are the maximum tax deductions a person or business can take on luxury passenger vehicles.

What Are Luxury Automobile Limitations?

The Luxury Automobile Limitation is the annual limit on the amount of depreciation that can be taken on a luxury car used for business purposes. This amount is indexed each year for inflation. The purpose of luxury automobile limitations is to control the type and amount of money spent on luxury automobiles by businesses for tax purposes.

Luxury Automobile Limitations are the maximum tax deductions a person or business can take on luxury passenger vehicles.
The Tax Cuts and Jobs Act (TCJA) of 2017 made important changes in tax law regarding luxury vehicles.
One important change is that the TCJA increased the amount of depreciation business owners could take on certain assets by $8,000 in the first year.

Understanding Luxury Automobile Limitations

The Tax Cuts and Jobs Act (TCJA) of 2017 was a wide-ranging tax reform legislation that changed deductions, depreciation, expensing, tax credits, and other tax items impacting businesses, self-employed individuals, and individual taxpayers. Under TCJA, changes were made to the depreciation of luxury automobiles with specific limits on depreciation deductions for owners of cars, trucks, and vans.

One important change is that the TCJA increased the amount of depreciation business owners could take on certain assets by $8,000 in the first year. It also extended and modified bonus depreciation for qualified property purchased after Sept. 27, 2017, and before Jan. 1, 2023, including business vehicles.

There are several different categories of luxury cars, and each has a different depreciation schedule. It's important to note that the designation "luxury vehicle" is used somewhat loosely by the IRS and is deemed to be a vehicle with four wheels used mainly on public motorways that must have an unloaded gross weight of 6,000 pounds or less. It is not in reference to a specific brand of car. Additionally, there are different rules for heavy SUVs, vans, and pickup trucks.

According to Bill Bischoff of MarketWatch, the TCJA deduction and bonus deduction only apply to relatively expensive vehicles (those that cost more than $58,000), otherwise, you use the modified accelerated cost recovery system (MACRS) table for depreciation. The rules for heavy vehicles (the SUVs, vans, and pickups mentioned above) are slightly different. In both cases, depreciation depends on how much the vehicle was used for business, typically 100% and at least 50%.

Requirements for Luxury Automobile Limitations

For luxury passenger vehicles used 100% for business and placed in service between Dec. 31, 2017, and Dec. 31, 2026, the TCJA allows 100% first-year bonus depreciation for qualifying new and used property. If the taxpayer doesn't claim bonus depreciation, the greatest allowable depreciation deduction is:

If the taxpayer does claim bonus depreciation, this is the schedule:

The new law also removes computer or peripheral equipment from the definition of listed property. This change applies to property placed in service after Dec. 31, 2017. The deduction will phase out beginning in 2023 and will be phased out completely by 2027 unless Congress decides to extend the tax deduction.

Examples of Luxury Automobile Limitation Deductions

If you decide your business needs a town car to shuttle important clients to and from the local airport, and you decide to spend $70,000 on something a little upscale because that's how your clients like to feel, the annual deductions will be as follows, if you claim the first-year bonus deduction:

The new depreciation rules adopted in the TCJA also extend deductions to used vehicles that were purchased and put into use after Sept. 27, 2017, though they have to meet certain requirements to qualify. Whenever deciding on purchases based on tax considerations, it is important to talk to a certified public accountant (CPA) or financial advisor.

Related terms:

Asset Depreciation Range (ADR)

Asset depreciation range (ADR) was used by the IRS to calculate the economic life of business assets. Find out how it was used and what replaced it. read more

Asset

An asset is a resource with economic value that an individual or corporation owns or controls with the expectation that it will provide a future benefit. read more

Bonus Depreciation

Bonus depreciation is a tax break that allows businesses to immediately deduct a large percentage, currently 100%, of the purchase price of eligible assets. read more

Cash for Clunkers

Cash for Clunkers was a former federal program that gave owners a way to dispose of old vehicles in exchange for more fuel-efficient cars. read more

Certified Public Accountant (CPA)

A certified public accountant (CPA) is a designation given to those who meet education and experience requirements and pass an exam. read more

Depreciation

Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value over time. read more

Mortgage Interest Deduction

A mortgage interest deduction allows homeowners to deduct mortgage interest from taxable income. Read who benefits from a mortgage interest deduction. read more

Inclusion Amount

Inclusion amount is an additional amount of income that a taxpayer may have to report if they leased a vehicle or other property for business purposes. read more

Inflation

Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. read more

Modified Accelerated Cost Recovery System (MACRS)

MACRS is a depreciation system allowed by the IRS for tax purposes.  read more