October 11, 2021 1:39 am

Dollar Limits on Writing Off Costs for Vehicles Bought or Leased in 2021

Vehicles acquired for business can result in tax write-offs. For vehicles that are purchased, there’s depreciation as long as you opt to deduct your actual costs and don’t use the IRS standard mileage rate. For vehicles that are leased, you can deduct you lease costs. The IRS announced the limitations that apply for depreciation or lease costs for vehicles purchased or first leased in 2021 (Rev. Proc. 2021-31).

Dollar limit on purchased vehicles. If you bought and placed in service in 2021 a car, light truck, or van that used for business, and you choose to deduct your actual costs rather than using the IRS standard mileage rate (56 cents per mile in 2021), you may deduct an allowance for depreciation. However, the deduction may not exceed a dollar limit specified by the IRS. For 2021, this is $18,200. If you opt not to claim bonus depreciation, the dollar limit on the depreciation allowance for 2021 is $10,200.

Note: If you use bonus depreciation, then be sure to follow the IRS safe harbor spelled out in Rev. Proc. 2019- 13 on claiming depreciation for years after 2021. Otherwise, no further depreciation deductions will be allowed until after the vehicle’s recovery period of five years.

Leased vehicles. Vehicles first leased in 2021 with a fair market value exceeding certain limits require that the business deduction for lease payments be reduced by an inclusion amount. The inclusion amounts apply to vehicles valued over $51,000. The inclusion amounts for vehicles first leased in 2021 are considerably lower than inclusion amounts for vehicles first leased in prior years. For example, if in 2021 you lease a vehicle valued at $61,000 that is used 100% for business, the inclusion amount for 2021 only $3. Had you leased the same vehicle in 2020, the inclusion amount for 2020 was $26.

Remember, if you are an employee who uses a vehicle for business driving, no deduction is allowed for unreimbursed expenses through 2025 due to the suspension of the itemized deduction for miscellaneous expenses subject to the 2%-of-adjusted-gross-income threshold.

 

 

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Tax Glossary

Fair market value

What a willing buyer would pay to a willing seller when neither is under any compulsion to buy or sell.

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