If you use your vehicle for business purposes, the Internal Revenue Service allows you to write off some of the vehicle's cost. By depreciating your vehicle, you deduct a specified amount of your taxable income to account for the vehicle's loss of value for each year of use. The IRS sets annual depreciation caps for luxury vehicle owners who opt for the actual cost method over the standard mileage rate.
According to the IRS, a "luxury vehicle" is any automobile that has four wheels, is used primarily on public roads and has an unloaded gross weight of under 6,000 pounds.
Luxury Defined on a Federal Level
The term "luxury vehicle" is often associated with expensive, high-end vehicles. However, for tax purposes, the term has a different meaning. The majority of all cars fit the IRS definition of a luxury vehicle, regardless of the cost. Trucks and vans, including minivans and sport utility vehicles generally fall into this category as well. Under the IRS definition, a luxury vehicle is four-wheeled, used mostly on public roads and must have an unloaded gross weight of 6,000 pounds or less. All trucks and vans in excess of 6,000 pounds are exempt from luxury vehicle caps.
Understanding Business Use
To claim the tax benefits of depreciating the vehicle, it must be purchased new. Although cars, trucks and vans may fall into the luxury-vehicle category, they do not have the same depreciation limits. Trucks and vans qualify for a higher depreciation as of 2017. The amount you can depreciate is reduced by the amount of time your vehicle is used for personal use. You are only entitled to the full depreciation amount if you use the vehicle exclusively for business purposes.
Assessing Passenger Vehicles
Using the Modified Accelerated Cost Recovery System, you can depreciate $11,160 for the first year the vehicle is in service. Without the first-year bonus, you can only depreciate $3,160 for the first tax year of use. For the second tax year, you are entitled to depreciate the car $5,100. The third year has a $3,050 depreciation cap. For the fourth year and each succeeding year after, you can depreciate $1,875 until the car is completely depreciated or no longer in use.
Defining Trucks and Vans
Trucks and vans that are considered luxury vehicles qualify for slightly higher depreciation limits. In 2017, the first-year depreciation cap with the bonus is $11,560. Without the bonus, you can depreciate $3,560 for the first year. For the second year of use, the limit is $5,700. The third-year depreciation limit is $3,450. The fourth and succeeding years are limited to $2,075.