Maximum Vehicle Depreciation Limits for 2023
Understand the 2023 IRS guidelines for deducting a business vehicle. The maximum write-off is determined by the vehicle's specific attributes and usage.
Vehicle depreciation allows a business to recover the cost of a vehicle over several years as it loses value. The Internal Revenue Service (IRS) establishes annual limits on the amount of depreciation that can be claimed. These regulations are updated periodically, with specific figures provided for vehicles placed into service during the 2023 tax year. Understanding these rules is a part of managing the taxable income of a business that relies on transportation.
Qualifying for Vehicle Depreciation
Before any depreciation deduction can be calculated, a taxpayer must meet a requirement regarding the vehicle’s use. To be eligible for certain accelerated depreciation methods, a vehicle must be used more than 50% of the time for qualified business purposes. Failing to meet this “more than 50% business use” threshold limits the taxpayer to less favorable depreciation calculations and disqualifies them from taking bonus depreciation or the Section 179 deduction.
To substantiate the business-use percentage, maintaining detailed records is required. Taxpayers should keep a mileage log for each vehicle that documents the date, total mileage, and specific business purpose of each trip. Personal use, including commuting, is generally not considered business use and must be tracked separately.
The business-use percentage is calculated by dividing total business miles by the total miles driven. This percentage is then applied to the vehicle’s cost to determine the depreciable basis. Without these records, a taxpayer would have difficulty defending their deduction if questioned by the IRS. If business use drops below 50% in a subsequent year, the IRS requires the recapture of some previously taken depreciation as ordinary income.
2023 Depreciation Limits for Passenger Automobiles
The IRS imposes annual depreciation limits for passenger automobiles, a category including cars, light trucks, and vans with a Gross Vehicle Weight Rating (GVWR) of 6,000 pounds or less. These caps, from Revenue Procedure 2023-14, apply to vehicles placed in service in 2023 and are designed to prevent excessive deductions for luxury vehicles.
For a passenger automobile placed in service in 2023, the first-year depreciation limit is $12,200. With the 80% bonus depreciation available for 2023, the first-year limit increases to $20,200. The depreciation limits continue over the vehicle’s recovery period:
- Second year: $19,500
- Third year: $11,700
- Each subsequent year: $6,960
If depreciation exceeds these annual caps, the excess amount is deducted in years following the standard recovery period, subject to the $6,960 annual limit.
Expanded Deductions for Heavy Vehicles
Vehicles with a Gross Vehicle Weight Rating (GVWR) over 6,000 pounds receive more generous tax treatment. This category includes many heavy sport utility vehicles (SUVs), pickups, and vans. Because of their weight, these vehicles are not subject to the annual luxury auto depreciation caps. This distinction allows businesses to write off a much larger portion of the vehicle’s cost in the first year.
For 2023, businesses could use Section 179 to expense a significant part of the purchase price of a qualifying heavy vehicle. These heavy vehicles also qualified for 80% bonus depreciation in 2023. This could be taken on the cost of the vehicle after any Section 179 deduction was applied. The combination of these provisions provides a tool for businesses to reduce their taxable income.
Understanding Bonus Depreciation vs. Section 179
Bonus depreciation and the Section 179 expense are methods for accelerating deductions, but they operate under different rules. For 2023, bonus depreciation allowed a taxpayer to deduct 80% of the cost of qualifying new or used property in the first year. This percentage is set to decrease to 60% in 2024, 40% in 2025, and eventually to 0% in 2027. Bonus depreciation is automatic for eligible property; a taxpayer must formally elect out if they do not wish to claim it.
The Section 179 deduction is an election made by the taxpayer. For 2023, the maximum amount that could be expensed under Section 179 was $1,160,000, subject to a phase-out if total equipment purchases exceeded $2,890,000. The total deduction cannot exceed the taxpayer’s net business income for the year, though any amount that cannot be deducted can be carried forward.
An operational difference is that bonus depreciation is not limited by business income and can create or increase a net operating loss, while Section 179 cannot. The choice between the two deductions is a strategic one based on the taxpayer’s specific financial situation, including their income and the total cost of their asset acquisitions for the year.