If you buy or lease a car, light truck, or van for your business, special tax rules may limit what you can write off. If you buy the vehicle, dollar limits cap depreciation write-offs. If you lease the vehicle, deductible lease payments must be reduced by an inclusion amount. The IRS has announced the numbers you need to know for 2018 (Rev. Proc. 2018-25).
Depreciation dollar limits. The 2018 dollar limits on depreciation of a vehicle were changed by the Tax Cuts and Jobs Act. They are $18,000 ($10,000 if you opt out of bonus depreciation) for the first year, $16,000 for the second year, $9,600 for the third year, and $5,760 for each succeeding year. These limits apply to light trucks and vans as well as to cars. However, for a vehicle acquired before September 28, 2017, and placed in service during 2018, the first-year dollar limit is capped at $16,400 (assuming bonus depreciation applies).
The higher dollar limits means that for many vehicles, the basic depreciation percentages (20% in the first year, 32% in the second year, 19.20% in the third year, 11.52% in fourth and fifth years, and 5.76% in the sixth year) likely will control write-offs because the depreciation allowance using these percentages is not greater than the dollar limits. For example, on January 1, 2018, you buy and place in service a vehicle costing $30,000. Your basic depreciation allowance is $6,000 (20% of $30,000). This is your depreciation allowance for 2018 because it is less than the $18,000 first-year dollar limit. A vehicle would need to cost at least $90,000 to trigger the first-year dollar limit.
Inclusion amounts. Due to the increased depreciation allowance, the inclusion amounts have been changed. There is no inclusion amount if the value of the vehicle first leased in 2018 is $50,000 or less. Inclusion amounts begin when the value of the vehicle first leased in 2018 is more than $50,000. In contrast, the inclusion amounts for vehicles first leased in 2017 began with cars valued at more than $19,000, and trucks and vans valued at over $19,500.