According to the US Bureau of Transportation Statistics, as of 2018, at least 3.1 million automobiles and trucks ply across the country for business purposes. This vast number shows the importance of these vehicles for businesses and the economy. It provides them with means to transport their goods and people to places unreachable just 50 years ago.

The many benefits of these vehicles make them great assets for businesses. One of its major drawbacks, however, is the big investment necessary to acquire one. This problem is especially true to businesses that are just starting and beginning to grow. Fortunately, businesses can recover some part of these investments in many ways, such as:

  • Leasing their vehicles to other companies during down times
  • Allowing employees to buy retired vehicles for a fraction of its original price
  • Claiming taxes deductions for the depreciated portion of your automotives

Deductions From Your Automobiles

For businesses with accountants, the third option should already be familiar with you. Automotives like cars, vans, and trucks are similar to prepaid expenses. As you use them, a portion of their useful lives are expensed.

As we all know, we treat expenses as deductions to our incomes to get our taxable income. We will in turn use this taxable income to calculate our tax liabilities. These deductions, however, have limits that the Internal Revenue Service sets.

There are often two types of limits in the recognizing automobile deductions. The first one is with regards to the total amount that business owners may deduct. This limit is often regardless of the valuation method companies use.

One such example is the recently passed limitations on depreciation deductions by the IRS. Revenue Procedure 2020-37 deals with the limits on depreciations for vehicles companies placed into service starting 2020. It also deals with the total income recognizable by vehicle lessees for passenger automobiles leased starting 2020.

You can read more on this topic with this article Sally P. Schreiber published on the Journal of Accountancy last July 9, 2020.

2020 depreciation limits for cars and trucks are issued

The IRS on Wednesday issued the limitations on depreciation deductions for passenger automobiles first placed in service in 2020 and the amounts of income inclusion for lessees of passenger automobiles first leased during 2020 (Rev. Proc. 2020-37).

For these purposes, passenger automobiles include trucks and vans. The amounts in the revenue procedure are inflation-adjusted as required by Sec. 280F(d)(7), using the automobile component of the chained consumer price index for all urban consumers (C-CPI-U). Click here to read more…

The IRS can also impose limitations on automobile depreciations deductible to our taxes through our valuation methods. For example, they may set the maximum amount of years we can depreciate automobiles with the straight-line method. The IRS may also set ceilings for the fair market value or principal values of our assets.

Last year, the Internal Revenue service proposed new limits for depreciating and valuating automobiles. You can read about this proposal with this article Sally P. Schreiber also wrote last August 23, 2019. You can also read the IRS’s original publication through this link.

Proposed regs. govern maximum automobile values

As promised in Notice 2019-08, the IRS issued proposed regulations that update the fleet-average and vehicle cents-per-mile valuation rules described in Regs. Secs. 1.61-21(d) and (e), respectively, to align the limitations on the maximum vehicle fair market values (FMVs) for use of these special valuation rules with recent statutory changes made to the depreciation limitations in Sec. 280F (REG-101378-19). Click here to read more…

Feel free to contact us if you have any more questions about the taxation and depreciation of your automobile assets. Our experienced Certified Public Accountants are always ready to assist you with your taxation needs. We can also help you with your corporate entity structure planning, and bookkeeping needs. Contact us now!