Year-End Car Buyers: Know the Tax Rules

2022 is the last year to take advantage of 100% bonus depreciation.

Thinking about buying a new car for your business? If you purchase before the end of the year, you’ll still be able to take advantage of a tax perk coming out of the 2017 Tax Cuts and Jobs Act: 100% bonus depreciation. But there are rules you need to be aware of before you take your first test drive.

Keisha L. Rondeno, CPA, shared these tips with attendees of NAR NXT, The REALTOR® Experience.

  • The car has to be used more than 50% of the time for business.
  • The 100% applies only to vehicles weighing between 6,000 lbs. and 14,000 lbs. So, think Ford F-450 (about 8,000 lbs.), not Honda Fit (about 2,500 lbs.). For cars under 6,000 lbs., you’ll be able to deduct a base amount and limited bonus depreciation.
  • If you buy a luxury vehicle, regardless of size, your bonus depreciation is limited.

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This temporary bonus depreciation rate decreases by 20% per year until 2026, when it expires if it’s not extended. Bear in mind that if you take the bonus depreciation in 2022, you’ll have to deduct business use of the car based on actual expenses, not mileage, for the next five years, Rondeno said. What if you’ve been tracking miles all year? She said you can still deduct based on the 2022 mileage rate, which was 58.5 cents per mile for the first half of the year but then bumped up to 62.5 cents for the last six months because of rising gas prices.

The important caveat, of course, is that you shouldn’t embark on any big purchases for tax advantages without first consulting with a qualified tax professional.

“The Internal Revenue Code is more than 2,600 pages long,” Rondeno said, and there are thousands more pages devoted to rules, regulations and tax court proceedings. “Only about 50 of these pages discuss what you can’t deduct. Every other page discusses what you can deduct. Make sure you’re making [the tax code] work for you.”