The Tax Cuts and Jobs Act has changed the tax rules for many taxpayers and many transactions, including the tax rules that govern depreciation or lease deductions for business autos, trade-ins of autos, write-offs for heavy SUVs, and deductions for employee-provided autos. This article takes a detailed look at the revised rules. This article also covers the new rules for heavy sport utility vehicles (SUVs) used for business, leased luxury autos, business auto trade-ins, and employee-provided autos.
100% Write-off for Heavy SUVs Used Entirely for Business
Depreciation dollar caps apply to the combined allowable deduction under Code Sec. 179 and MACRS depreciation for “passenger autos”. The dollar caps apply to passenger autos, i.e., four-wheeled vehicles manufactured primarily for use on public streets, roads, and highways, and rated at an unloaded gross vehicle weight (GVW) of 6,000 pounds or less. (Certain types of vehicles, such as ambulances, are excepted.) For a truck or van, the 6,000-pound test is applied to the truck’s or van’s gross (i.e., loaded) vehicle weight.
Heavy SUVs—those with a GVW rating of more than 6,000 pounds—are exempt from the luxury auto dollar caps because they fall outside of the definition of a passenger auto.
Under the Tax Cuts and Jobs Act, the first-year bonus depreciation percentage is 100% (instead of 50%, as under prior law), effective generally for bonus-depreciation-eligible “qualified property” placed in service after September 27, 2017, and before January 1, 2023. Qualified property generally includes property bought used as well as new, to which MACRS applies and which has a recovery period of 20 years or less. Autos and trucks are 5-year MACRS property and thus qualify for bonus depreciation (assuming business use exceeds 50% of total use).
Thus, a taxpayer that buys and places in service a new heavy SUV after September 27, 2017, and before January 1, 2023, and uses it 100% for business, may write off its entire cost in the placed-in-service year. For example, if a taxpayer buys a $70,000 heavy SUV in, say, March of 2018, and uses it entirely for business, it may write off the full $70,000 cost of the vehicle on its 2018 return.
A taxpayer may elect to “step down” from 100% to 50% bonus depreciation for assets in the 5-year MACRS class (or for that matter, any other class) if they are bonus-depreciation-eligible and are placed in service during the first tax year ending after Sept. 27, 2017. If this choice is made, a hefty portion of the cost of a heavy SUV bought and placed in service during this tax year still would be deductible in the first year.
Subject to the overall expensing limits, not more than $25,000 of the cost of a heavy SUV may be expensed under Code Sec. 179 (under the Tax Cut and Jobs Act, that dollar figure will be indexed for tax years that begin after 2018). Additionally, because heavy SUVs are exempt from the luxury auto dollar caps, the balance of the heavy SUV’s cost may be depreciated under the regular rules that apply to 5-year MACRS property.
Illustration A fiscal year taxpayer with a tax year ending on April 30, buys a $60,000 heavy SUV in February of 2018 and uses it 100% for business. The taxpayer makes the step-down election from 100% to 50% bonus depreciation deduction for its 5-year MACRS assets placed in service in the first tax year ending after Sept. 27, 2017. It may write off $46,000 of the cost of the vehicle on its 2018 return, as follows:
- $25,000 expensing deduction, plus
- $17,500 of bonus first-year depreciation (($60,000 – $25,000 of expensing) × .50 = $17,500), plus
- $3,500 of regular first-year depreciation (($60,000 – $25,000 of expensing – $17,500 bonus depreciation) × .20 = $3,500).
Impact of New Law on Leased Business Autos
A taxpayer that leases a business auto may deduct the part of the lease payment representing business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that lessees can’t avoid the effect of the luxury auto limits, however, they must include a certain amount in income (the income inclusion amount) during each year of the lease to partially offset the lease deduction, if the vehicle’s fair market value (FMV) exceeds certain dollar limits. The income inclusion amount varies with the initial FMV of the leased auto and the year of the lease.
IRS publishes lease income inclusion tables for every calendar year. For vehicles first leased in 2017, there’s no inclusion amount unless the FMV of the vehicle exceeds $19,000 ($19,500 for a truck or van).
Observation: It’s reasonable to assume that for autos first leased in 2018, there won’t be a lease income inclusion amount at all unless the FMV of the vehicle exceeds a much higher figure, perhaps in the mid-$50,000 range, Additionally, it’s reasonable to expect that the income inclusion amount for higher-priced autos first leased in 2018 will be less than they were for comparably priced autos first leased in 2017.
How the New Law Affects Trade-Ins of Business Autos
A taxpayer may acquire a business auto by trading in another business auto and paying cash. Before the Tax Cuts and Jobs Act, the trade-in yielded neither gain nor loss since the transaction was treated as a like-kind exchange under Code Sec. 1031.
Determining depreciation where an old business auto (the relinquished auto) was traded-in for a new business auto (the replacement auto) was complicated by the need to take into account the luxury auto dollar caps (i.e., limits on maximum depreciation allowances) that apply to passenger autos. The regs carry a complex set of rules that have the net effect of limiting the combined depreciation allowance for the traded-in auto and the replacement auto to the replacement auto’s dollar limit for the tax year. Under a simplifying election out, the exchanged basis (i.e., remaining basis in the traded-in car) and excess basis (i.e., additional consideration) to acquire the replacement car, are treated as being placed in service by the taxpayer at the time of replacement, and the adjusted depreciable basis of the relinquished auto is treated as being disposed of by the taxpayer at the time of disposition.
Under the Tax Cuts and Jobs Act, the above rules no longer apply for exchanges after December 31, 2017. Like-kind exchange treatment—i.e., the non-recognition of gain or loss—is limited to the exchange of real property held for productive use in a trade or business or for investment solely for real property of like kind which is to be held either for productive use in a trade or business or for investment. Thus, under the Tax Cuts and Jobs Act, exchanges of autos after December 31, 2017, do not qualify as tax-free.
The taxpayer will have gain or loss on the traded-in auto, depending on its trade-in value and the remaining basis in it. The new auto’s basis for depreciation will be its cost and it will be subject to the luxury auto dollar limits as if it were acquired via an all-cash purchase.
Observation: Where depreciation on the traded-in auto was limited by the luxury auto dollar caps, the taxpayer’s remaining basis in it may well exceed the auto’s trade-in value, particularly if the auto was a more expensive model. Here, the result will be a loss that’s recognized just as if it would be if the car were sold outright instead of being traded in.
Deductions End for Unreimbursed Business Auto Expenses of Employees
Although many companies supply autos to employees who must drive for employment-related business reasons, others require workers to supply their own autos. Before 2018, if workers weren’t reimbursed for such auto expenses, they could claim them on Schedule A, Form 1040, as miscellaneous itemized deductions, deductible to the extent such deductions cumulatively exceeded 2% of adjusted gross income.
Under the Tax Cuts and Jobs Act, effective for tax years beginning after 2017 and before 2026, miscellaneous itemized deductions (including unreimbursed employee business expenses) are disallowed.
Observation: Employees may be able to negotiate a salary increase to compensate for the loss of the deduction, or persuade their employers to provide reimbursements under the accountable plan rules, such as a properly substantiated (time, place, mileage and business purpose) mileage allowance not in excess of the standard mileage rate (54.5¢ per mile for business travel after 2017). Reimbursements under an accountable plan don’t saddle employees with income.
Source: Thomson Reuters Checkpoint Newsstand 2/28/18