Luxury Automobile Limitations

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.

Key Takeaways

  • 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:

  • $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.

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:

  • $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. Whenever deciding on purchases based on tax considerations, it is important to talk to a certified public accountant (CPA) or financial advisor.

Article Sources
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  1. Internal Revenue Service. "New Rules and Limitations for Depreciation and Expensing Under the Tax Cuts and Jobs Act." Accessed Feb. 27, 2021.

  2. Internal Revenue Service. "Tax Reform Changes Depreciation Limits On Luxury Automobiles." Accessed Feb. 27, 2021.

  3. Internal Revenue Service. "26 CFR 601.105: Examination of Returns and Claims for Refund, Credit, or Abatement; Determination of Correct Tax Liability," Page 2. Accessed Feb. 27, 2021.

  4. Internal Revenue Service. "Publication 463: Travel, Gift, and Car Expenses 2019," Page 15. Accessed Feb. 27, 2021.

  5. Internal Revenue Service. "Publication 946: How to Depreciate Property," Pages 27, 36, and 69. Accessed Feb. 27, 2021.

  6. MarketWatch. "How Small Business Owners Can Take Advantage of the New Tax Law Before It’s Too Late." Accessed Feb. 27, 2021.

  7. Internal Revenue Service. "Publication 463: Travel, Gift, and Car Expenses 2019 Returns," Page 17. Accessed Feb. 27, 2021.

  8. Internal Revenue Service. "26 CFR 601.105: Examination of Returns and Claims for Refund, Credit, or Abatement; Determination of Correct Tax Liability," Page 6. Accessed Feb. 27, 2021.

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