New Assignment Form
Contact Us

How Depreciation Rules Impact Deductions

Posted by Peter DeMarco on May 29, 2015 10:29:00 AM

Small Business Tax for Entrepreneurs

When looking at tax for small businesses, let's look at an example many entrepreneurs face. You may have one or a few cars related to your company that are subjected to tax laws in regards to claiming expenses for owning the vehicles. Depreciation rules are tricky and often disregarded because segments of the rules are not well outlined.

Entrepreneurs are permitted by the U.S. Tax code to deduct from their taxable income the full price tag of qualifying equipment in any given year; limits are also set on depreciation for public transport vehicles. At inception, vehicle devaluation limits were known as “luxury automobiles.”

Over the years, changes in vehicle prices occur thus increasing range of vehicles and it is applied to more vehicles outside of those truly labeled luxury. This applied to any vehicle that was valued more than $15,800 in 2014; this applied to trucks and vans whose value is more than $17,300.

There were several new cars in 2014 that cost beyond these prices for buyers.  It meant that your vehicle was subject to depreciation limits even if it wasn’t a luxury car. In 2014, depreciation for the first year started at $3,160, and increased to $5,100 and $3,050 for the second and third years consecutively. It stood at $1,875 thereafter. The figure for light trucks and vans begun at $3,460, was at a high of $5,500, and lowered to $1,975.  These rules are known as the Sec. 280F limits.

Together with the conventional deduction rules and depreciation limits, bonus depreciation and Sec. 179 expense deductions there is complexity. A taxpayer can have an extra 50% reduction for property that qualifies for bonus depreciation in its first year of service; this was in effect for 2014. The Sec. 179 expensing deduction lets the write-off of up to $500,000 of the cost of qualified capital expenditures, these does not apply to purchases exceeding $2 million. If passenger cars are used more than 50% for business purposes and the taxpayer did not opt out of bonus depreciation they qualify, in addition to Sec. 179 deductions. These, however, are limited and only raise the depreciation allowance by $8,000 for the first year.

If you bought a vehicle in 2014 for $28,000 and used it fully for business purposes, the depreciation calculation could be like this: Under either the bonus depreciation or Sec. 179 rules, the maximum amount deductible is $8,000. Then, using the standard depreciation calculations for automobiles under Sec. 280F, the owner can ask for a standard depreciation amount of $3,160. Those would total to $11,160 first-year depreciation.

For light trucks and vans, it would be different; this would also include SUVs, which are at times considered passenger vehicles. These vehicles do not meet the criteria for passenger vehicles in the tax code, and are not subject to the same depreciation limits. In these cases, the gross vehicle weight will determine if the limitation is applicable or not. Further, if the vehicle is not fully used for business, then the depreciation deductions, including any bonus depreciation or Sec.179 deduction, will be reduced as deemed fit.

Regardless of the intricacy, devaluation guidelines have given entrepreneurs great incentives of late to quicken vehicle purchases. It's troublesome, on the other hand, to exaggerate the significance of wading into the depreciation standards to optimize the deduction.

Self-employed tax tips

Topics: Tax Planning & Strategies, Small Business

Peter DeMarco

Peter DeMarco

Peter DeMarco, with nearly three decades of tax planning experience, is a Vice President at Meaden & Moore as well as Director of the Tax Services Group.