Small business owners, including real estate agents, have two methods available for deducting their auto use: The Standard Mileage Rate and the Actual Cost Method. Those who use the actual cost method are required to depreciate their vehicles. We cover the Standard Mileage Rate and The Actual Cost Method in other articles on OvernightAccountant.com. We also discuss the auto deduction in our Real Estate Agent Tax-Cut Library. This article expands on our article covering auto depreciation by sharing the basics of Bonus Depreciation and the 179 Expense as they pertain to vehicles. We will also discuss the depreciation limits that apply to vehicles.
As discussed in our auto depreciation article, there are three reasons why we stick to the basics when it comes to auto depreciation: 1) The complexity of the topic in relation to our purpose, 2) The limits on vehicle depreciation that intertwine depreciation, bonus depreciation, and the 179 expense, and 3) The frequency with which Congress changes depreciation rules.
It is for these reasons that we recommend that an agent claiming actual auto expenses have a tax professional prepare their return.
Bonus Depreciation and the Section 179 Expense – Overview: Bonus Depreciation and the Section 179 Expense are two areas of taxation that allow business owners to expense assets, or portions thereof, in the tax-year the asset is placed in service.
Bonus Depreciation is also called the Special Depreciation Allowance. It allows (actually requires) the taxpayer to depreciate a certain percentage of qualifying property placed in service during the year. From 2018 through 2022 the bonus depreciation percentage rate is 100%, unless – of course – congress changes it before 2022. One hundred percent bonus depreciation means the taxpayer can expense all of a qualifying assets’ cost in the year they start to use it. Unfortunately, limits on vehicle depreciation mean that many vehicles will not qualify for 100% bonus depreciation.
Before the passage of the Tax Cut and Jobs Act of 2017 only purchases of new assets qualified for bonus depreciation. The Tax Cut and Jobs Act of 2017 made many used items qualify for bonus depreciation as long as the used item was purchased for business use and was new to the buyer.
As mentioned above, utilizing bonus depreciation is mandatory unless the taxpayer elects out of it by a statement to their return. Opting out of bonus depreciation is done by depreciable class, meaning that opting out must be done for all property with a particular class-life (for example, assets depreciated over five years, seven years, etc.). For more general information on Bonus Depreciation, we’ll have a future article on Real Estate Agents & Bonus Depreciation which will be posted in our Real Estate Agents articles archive.
Section 179 Expense flows from Section 179 of the Internal Revenue Code, Election to Expense Certain Depreciable Business Assets. The 179 Expense allows business owners to deduct the desired amount of a qualified asset’s value (up to limits that will not impact most real estate agents) in the year it is placed in service. Unlike Bonus Depreciation, the Section 179 Expense is not mandatory. The taxpayer elects the amount of the asset’s value they wish to expense. The election is made in Part 1 of Form 4562 Depreciation and Amortization. Section 179 expenses cannot create a loss, so any 179 Expense not used on one year’s tax return is carried forward to the next. For more general information on Bonus Depreciation, we’ll have a future article on Real Estate Agents & The Section 179 Expense which will be posted in our Real Estate Agents articles archive.
Limits on Vehicle Depreciation, Bonus Depreciation, and Section 179 Expense: There are a plethora of limitations on how much certain vehicles can be expensed or written off each year. These limitations can get highly technical – to the point where they become useless to the average reader. For this reason, we recommend that agents claiming actual auto expenses have a professional prepare their tax returns. In the sections that follow, we will explain the basics of these limits.
Section 280F Limits: IRS Code Section 280F places limits on how much depreciation, bonus depreciation, and section 179 expense can be claimed on certain vehicles each year. These limits include most cars, trucks, and vans used as passenger vehicles.
Section 280F Limits - Passenger Autos: A vehicle that the IRS considers a Passenger Auto has the most significant limitation on the amount of depreciation claimed in a given year. The IRS defines a Passenger Auto as a car, truck, SUV, or van with an UNLOADED gross vehicle weight (GVW) of 6,000 pounds or less. The limits depreciation limits on passenger vehicles change occasionally and can vary between autos (cars) and trucks & vans. Below are the limits for 2018 (and following years until congress changes them). These limits apply to cars, trucks, and vans that are considered passenger autos and cap the amount of depreciation, bonus depreciation, and 179 expense allowed on a passenger auto in a given year.
- Year 1 (if Bonus Depreciation claimed): $18,000
- Year 1 (if no Bonus Depreciation claimed): $10,000
- Year 2: $16,000
- Year 3:$9,600
- Year 4 (and all later years): $5,760
The year four and later years limit of $5,760 continues each year until any remaining depreciation is used up.
Confusing Exceptions: Section 280F limits do not apply to all vehicles. Here are a few common examples encountered by real estate agents:
- SUV’s with an UNLOADED gross vehicle weight greater than 6,000 pounds but less than 14,000 pounds are allowed to claim a Section 179 expense of up to $25,000.
- Trucks with an interior bed-length of six feet or more are NOT subject to this $25,000 limit.
- Trucks over 6,000 pounds UNLOADED gross vehicle weight with beds shorter than six feet are considered SUVs and subject to the $25,000 limit.
- Trucks, vans, and SUVs with a LOADED gross vehicle weight of over 6,000 pounds are NOT subject to the Section 280F limits. These assets qualify for 100% bonus depreciation as well as regular depreciation and section 179 expense rules.
Deduction Limited by Business-Use Percentage: The depreciation, bonus depreciation, and section 179 expense discussed in this article must apply the business use percentage requirements discussed in our article Real Estate Agents, Deducting Auto Expenses: Depreciation.
The business use of the vehicles must be greater than 50% to utilize the 200% Declining Balance depreciation method discussed in our depreciation article. If the vehicle is used less than 50% for business, only the Straight-Line depreciation method is available. It must also be used more than 50% for business to qualify for the special depreciation allowance (bonus depreciation).
Bonus Depreciation & Section 179 Expense Recapture: If bonus depreciation or the section 179 expense are deducted and business use drops below 50% in any later depreciable year (also called the recovery period), a portion of the bonus depreciation and 179 expense claimed must be reported as ordinary income. The amount reported as income is the difference between bonus depreciation and section 179 expense deducted and the amount that would have been allowed if the vehicle was depreciated using straight-line depreciation. This recapture rule also applies to a vehicle utilizing the 200% Declining-Balance method. We discuss Straight-line and 200% Declining-Balance depreciation in our vehicle depreciation article.
The recaptured income reported when vehicle use drops below 50% is also subject to self-employment tax.
Take Away: Bonus Depreciation and Section 179 Expense are valuable tools to cut a real estate agent’s tax. The rules governing their application, however, are highly complex and often require a tax professional to navigate correctly.
Summary and Invite: We hope this article has helped you to understand the basics of Bonus Depreciation and The Section 179 Expense. If you’d like to learn more about cutting your most significant expense, TAXES, check out our Real Estate Agent Tax Cut Library. The Real Estate Agent Tax Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.