Business Vehicle Tax Considerations

Need a Business Vehicle? Tax Considerations to Factor into Your Choices

Business Vehicle Tax ConsiderationsAre you thinking about getting a car, truck, or van now? Hybrid or electric-powered vehicle? Buy or lease a vehicle? And in who’s name (the owner or the business)? Your choice is usually based on business needs, fuel efficiency, your budget, financing options, and insurance costs. But whatever choice you make affects your taxes, which ultimately impacts your bottom line.

Here are some tax pointers to keep in mind for your next business vehicle.

Tax credit for plug-in electric drive vehicles

There’s a federal tax credit if you buy certain vehicles powered exclusively by plugging in and charging (not a hybrid). There’s no comparable break for leasing a plug-in electric drive vehicle. The maximum credit is $7,500 for a 4-wheel vehicle or, for 2021 only, a  credit up to $2,500 for a 2-wheel vehicle. If the vehicle is used exclusively for business, then the full amount of the credit is part general business credit, an annual limit on total business income tax credits, and the amount for the vehicle claimed currently may be limited.

Electrek has a complete list of vehicles qualifying for the federal tax credit. Note that Tesla and GM vehicles no longer qualify for any credit because the manufacturers have sold more than 200,000 qualified vehicles—a limit imposed by tax law. DSIRE has a state-by-state listing of tax breaks applicable to energy-efficient vehicles.

Note: Pending legislation may introduce new incentives for plug-in electric drive vehicles.

Beware of trade-ins

In the past, if you traded in your old vehicle, you could effectively roll any gain into the basis of the new vehicle. This meant no immediate tax, although it resulted in smaller write-offs going forward. But now, when you trade in your old vehicle, you must report any gain, which is the difference of what you receive (or are credited toward you new vehicle) and the vehicle’s basis. The basis is your original cost minus depreciation if you deducted the actual costs of operating the vehicle or a deemed depreciation allowance if you used the IRS standard mileage rate. The deemed depreciation rate, which may be changed annually, is 26¢ per mile per mile for business driving in 2021 (it was 27¢ per mile for 2020 and 26¢ per mile for 2019).

Deducting operating costs

You usually have a choice of deducting your actual costs—including depreciation if you own the vehicle or lease payments if you lease the vehicle—or relying on an IRS standard mileage rate (e.g., 56¢ per mile for driving in 2021). But it’s not as simple as this seems:

  • Depreciation may be limited for luxury vehicles, the value of which may change each year. Because there’s a dollar limit on depreciation for vehicles placed in service in 2021 of $18,200 (assuming bonus depreciation is used), the limit for the first year doesn’t really apply unless the vehicle costs more than $91,000; the limit for subsequent years would apply to a vehicle costing much less. The IRS listed dollar limits for vehicles bought and placed in service in 2021 (see Tables 1 and 2).
  • The cost of heavy SUVs (over 6,000 pounds), which is not subject to the dollar limits above, may be fully depreciated in the year of purchase as long as bonus depreciation applies.
  • The cost of non-personal use vehicles bought and placed in service in 2021 may be fully deducted using 100% bonus depreciation. Such vehicles include, for example, a delivery truck with seating only for the driver (or another person with a jump seat), flatbeds, and dump trucks.
  • Expensive leased vehicles (e.g., those with a fair market value over $51,000 if first leased in 2021) have an “inclusion amount” that reduces the deductible portion of lease payments. Inclusion amounts for vehicles first least in 2021 are modest, even for very expensive vehicles.
  • The deduction for interest payments on loans to buy business vehicles may be subject to limitation. However, small businesses (those with average annual gross receipts in the 3 prior years not exceeding $26 million) are exempt from this limitation.

Final thought

Ultimately, the decision of the vehicle you get now may hinge on what you like. But it may pay to discuss your options with your CPA or other financial adviser before making a final decision.

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