Luxury Car Rules: ‘How to Avoid Indulging in Luxury Car Limitations’

In the market for a new car and hoping to kill two birds with one stone? Taking the time to research the tax implications on both your personal and professional finances with the right vehicle purchase could land you long-term savings. However, not examining the tax code closely enough could leave you paying more than you budgeted for. Here are some things to keep in mind before driving your new car off the lot.

The IRS puts limitations on vehicles that may be considered luxury purchases, by restricting the amount of allowable depreciation. The standards aim to push any cost of upgrading an automobile from a standard purchase to a luxury model as a personal expense to the buyer, rather than tax deductible. The depreciation limitations on passenger automobiles are below, per IRC Section 280F.

• $2,560 for the first taxable year
• $4,100 for the second taxable year
• $2,450 for the third taxable year
• $1,475 for each subsequent taxable year

Please note that the taxable year limitations are effective for each year of the recovery period per MACRS tax depreciation. The excess of the recovered amount can be expensed in the year subsequent to the last taxable year in the recovery period, not to exceed $1,475. Therefore, even if a car would not commonly be considered as ‘luxury,’ many standard new cars can be affected by the depreciation limitations.

The luxury vehicle rules should be addressed before any purchase of a business use vehicle, due to the wide range of vehicle prices that fall into the ‘luxury’ category. Depending on the recovery period, the Company should decide if the planned vehicle purchase is still attractive after tax concerns. One possibly beneficial route may be to consider buying an SUV or Truck instead of a standard passenger automobile.

The luxury car rules apply to business-use passenger automobiles, but not to vehicles with a gross vehicle weight rating (GVWR) over 6,000 pounds. Business-use vehicles with a GVWR over 6,000 pounds are eligible for a Section 179 deduction, which allows for up to $25,000 expensed as a deduction in the first taxable year. The GVWR can be found on manufacturer websites, as well as on a plate on the driver side door with the vehicle specifications. Qualifying for Section 179 would provide the largest first year deduction, versus the luxury car limits noted above. Overall, the Company should assess their tax deduction and vehicle needs before purchasing new business-use vehicles.

Source: RIA IRC 280F

Got questions? Connect with an experienced Aprio advisor today.
Schedule a Consultation