Dealerships: Here’s a Tax Tip That Could Give You an Edge in Year-End Sales
Your dealership’s sales team could find some customer prospecting opportunities — and perhaps a bit of an edge in the competition for year-end sales — with knowledge of vehicles that qualify for favorable tax deductions when used for business purposes.
Many companies and individuals like to take advantage of year-end offers when purchasing a car, truck, or van for business use. As part of a savvy tax strategy, they also look for possible related deductions that may reduce their income tax in the coming year.
To help your salespeople in their conversations with such customers, here’s a review of the general rules and limitations, along with a downloadable list of makes and models that qualify for more favorable tax deductions. Naturally, you’ll want to point customers to a tax professional for the final word on tax benefits related to their vehicle purchases.
Unfavorable depreciation rules apply to most passenger autos and lighter trucks and vans
First, it may be helpful to know that the IRS limits deductions on passenger autos and lighter-weight trucks and vans (gross vehicles weight, or GVW, less than 6000 pounds — unloaded passenger autos and loaded for trucks and vans). The first year depreciation deduction amount for these vehicles is $3,160 for passenger autos and $3,560 for lighter-weight trucks and vans. If the vehicles are brand new and used more than 50 percent for approved business, they can also qualify for an additional 50 percent bonus depreciation deduction up to $8,000. Under current law, bonus deprecation for all eligible property is set to be phased out by 2020. Bonus depreciation will be reduced to 40 percent of costs in 2018 and 30 percent of costs in 2019.
For example, if a customer bought a pre-owned sedan for $25,000 exclusively for qualified business use, the maximum first-year depreciation expense would be limited to $3,160. If that same customer instead bought a new sedan for $35,000, he or she would not only be able to claim first-year depreciation expense of up to $3,160 but would also be entitled bonus depreciation of $8,000, bringing the total first-year deduction to $11,160.
A caveat to the example above is that if the qualified business use of the vehicle is below 100 percent, the depreciation deduction will be limited to the actual business use percentage of the vehicle. In addition, the IRS requires that written records be kept in order to substantiate the business use of the vehicle, such as a mileage log with a description of the business purpose of the trip.
Depreciation rules related to certain heavier trucks, vans, and SUVs (GVW above 6,000 pounds)
The rules relating to heavier trucks, SUVs, and vans used more than 50 percent of the time for qualified business are much more favorable. With these vehicles, customers can take a deduction of up to $25,000 (even if purchased near year end). In addition, if the vehicle is new, the customer may qualify for additional bonus depreciation equal to 50 percent of the remaining cost of the vehicle, without limit.
According to IRS regulations, a vehicle is not subject to passenger auto depreciation limits when it has a GVW over 6,000 pounds.
For example, if a customer purchased a used SUV for $65,000, placed it in service in 2017, and used it 100 percent percent for qualified business, then the customer could be entitled to a $25,000 deduction and $8,000 of regular first-year depreciation, for a total deduction of $33,000. In the same scenario, if the customer purchased a new SUV for $85,000, the customer could be entitled to a $25,000 deduction, a $30,000 bonus depreciation deduction, and $6,000 of regular first-year depreciation for a total deduction of $61,000.
As with the passenger automobile limitations, your customers would still be required to keep written records to substantiate the business use of the vehicle. Depreciation deductions would also be reduced if the vehicle was not used exclusively for qualified business purposes.
Vehicles eligible to be fully deducted
Certain vehicles can be fully expensed by your customers in the year they’re placed into service, assuming they don’t exceed the limitations for eligible property. These vehicles include but are not limited to:
- Vehicles equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from the passenger compartment
- Vehicles designed to have a seating capacity of more than nine persons behind the driver's seat
- Vehicles with a GVW in excess of 14,000 pounds
- An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business
- A vehicle used directly in the trade or business of transporting persons or property for pay or hire
- Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat
- Qualified moving vans
- Qualified specialized utility repair trucks
- Tractors and other special purpose farm vehicles
- Passenger automobiles leased or held for leasing by anyone regularly engaged in the business of leasing passenger automobiles
Makes and models eligible for special tax benefits
Here’s a downloadable list of many of the 2017 vehicle models that qualify for these special tax benefits based on their GVWs at the time we checked them. It’s a surprisingly long list, and there may be some we have missed (new and retooled models are coming out all the time). So, advise your customers to verify the GVW and manufacturer’s classification before making a buying decision. The GVW can normally be found on a label attached to the inside edge of the driver’s side door.Download the list
How we can help
CLA’s dealership industry and tax professionals can help your dealership salespeople understand tax benefits related to vehicles purchased for business use. A basic working knowledge of the rules and list of vehicles can be a part of your sales consultations.