Luxury Automobile Limitations: Overview and Examples

What Are Luxury Automobile Limitations?

The Luxury Automobile Limitation is the annual cap on depreciation for luxury cars used for business purposes. This cap is adjusted yearly for inflation. The purpose of these limitations is to regulate the amount spent on luxury vehicles by businesses for tax purposes.

Key Takeaways

• Luxury Automobile Limitations are the maximum tax deductions for luxury passenger vehicles.
• The Tax Cuts and Jobs Act (TCJA) of 2017 introduced important changes in tax law regarding luxury vehicles.
• Under the TCJA, business owners can now claim higher depreciation on certain assets in the first year, with an increase of $8,000.

Understanding Luxury Automobile Limitations

The Tax Cuts and Jobs Act (TCJA) of 2017 made wide-ranging changes to tax laws, including regulations on deductions, depreciation, and tax credits for businesses and taxpayers. One area affected by the TCJA is the depreciation of luxury vehicles, with specific limits on deductions for owners of cars, trucks, and vans.

Luxury cars have different depreciation schedules, and the IRS defines them as vehicles with four wheels used primarily on public motorways and having an unloaded gross weight of 6,000 pounds or less. The term "luxury vehicle" does not refer to a particular brand. Different rules apply to heavy SUVs, vans, and pickup trucks.

According to Bill Bischoff of MarketWatch, the TCJA deduction and bonus deduction only apply to relatively expensive vehicles costing more than $58,000. For other vehicles, the modified accelerated cost recovery system (MACRS) table is used for depreciation. Depreciation rates depend on the vehicle’s business use, usually ranging from 50% to 100%.

Requirements for Luxury Automobile Limitations

For luxury passenger vehicles used 100% for business and placed in service between December 31, 2017, and December 31, 2026, the TCJA allows 100% first-year bonus depreciation for qualifying new and used vehicles. If bonus depreciation is not claimed, the maximum depreciation deduction is:

• $10,000 for the first year
• $16,000 for the second year
• $9,600 for the third year
• $5,760 for each subsequent taxable year

If bonus depreciation is claimed, the schedule is as follows:

• $18,000 for the first year
• $16,000 for the second year
• $9,600 for the third year
• $5,760 for each subsequent taxable year

The TCJA also excludes computer or peripheral equipment from the definition of listed property, starting from January 1, 2018. This deduction will phase out beginning in 2023 and be fully phased out by 2027, unless Congress decides to extend it.

Examples of Luxury Automobile Limitation Deductions

If you decide to purchase a town car for business purposes, spending $70,000 to provide upscale transportation for your clients, the annual deductions, if the first-year bonus deduction is claimed, will be as follows:

• $18,000 in the first year
• $16,000 in the second year
• $9,600 in the third year
• $5,760 for the rest of the depreciation period

The TCJA also extends deductions to used vehicles purchased after September 27, 2017, as long as they meet certain requirements. When making tax-related purchasing decisions, it’s important to consult a certified public accountant (CPA) or financial advisor.