The IRS has increased the annual depreciation limit for cars, trucks, and vans placed in service during 2023. Depreciation limits are tied to inflation, and for two years in a row, the annual updates have risen to match the sharp increase in costs. Over the last three years, the price of used and new vehicles, like many other goods and services, has skyrocketed. Used car and truck prices increased by almost 40 percent since 2019. Buying a new vehicle has been hampered by chip shortages, supply chain disruptions, low inventories, high consumer demand, and now, inflation.
The market may be easing up, but 2023 will be anything but normal. Interest rates are still high, making the cost of ownership higher. Denver buyers are becoming accustomed to ordering vehicles and waiting a few months rather than driving a car off the lot. Used vehicle prices are expected to fall, especially cars older than four years old. Buyers just aren’t willing to pay the high sticker prices anymore.
As the cost of practically everything rises and purchasing power erodes, there is a silver lining: IRS inflation adjustments. Each year, the IRS sets limits on the value of tax incentives according to inflation. From the standard deduction to retirement account contributions, there are more than 60 tax provisions that are updated each year.
Updated Passenger Vehicle Depreciation Limits
In 2023, the depreciation limit has increased by $1,000 to $20,200 for the first tax year the vehicle is placed in service when 168(k) bonus depreciation applies. 2022’s increase was also $1,000 more than the year before.
Succeeding tax year depreciation limits are as follows:
- Year two: $19,500
- Year three: $11,700
- Year four and beyond: $6,960
Each amount is higher than 2022 by as much as $1,500, $900, and $500 for years two, three, and four, respectively.
The above limits only apply if the owner uses the vehicle for business purposes less than half the time, elects out of first-year depreciation, and bought or otherwise obtained the vehicle before September 28, 2017, and placed it in service after 2019.
Owners who elect bonus depreciation with a vehicle that exceeds the year’s depreciable basis – $20,200 in 2023 – would treat the excess as a deductible expense in the first taxable year at the end of the recovery period, which is usually five years for passenger vehicles.
If the vehicle owner elects out of first-year bonus depreciation, the limits are:
- Year one: $12,200
- Year two: $19,500
- Year three: $11,700
- Year four and beyond: $6,960
Generally, the depreciation limits apply to cars, trucks, and vans with a gross vehicle weight rating of less than 6,000 pounds. The depreciation limits don’t apply to vehicles that cost less than the limit.
Bonus Depreciation
As noted above, vehicle owners can choose to take a higher first-year bonus depreciation or elect out of it. This is a temporary tax incentive under Section 168(k) that was extended and modified in the Tax Cuts and Jobs Act.
Qualifying vehicles must be placed in service between September 27, 2017, and December 31, 2026. Vehicle owners who claim bonus depreciation can take a deduction equal to a percentage of the vehicle’s adjusted basis. For tax years 2018 through 2022, the depreciation deduction was 100 percent.
Beginning in 2023, the deduction is lowered to 80 percent, then another 20 percent each year until first-year bonus depreciation phases out at the end of 2026. Both new and used vehicles qualify for bonus depreciation.
Depreciation Limits for Leased Vehicles
Leased vehicle depreciation limits were also increased in the latest revenue ruling. Amounts vary depending on the vehicle’s fair market value throughout the lease term. The lessee must include in gross income an inclusion amount correlated with the vehicle’s fair market value.
For example, a lessee who begins a new lease term in 2023 with a vehicle fair market value of $75,000 would include the following dollar amounts in gross income.
- Year one: $91
- Year two: $200
- Year three: $296
- Year four: $358
- Year five and beyond: $414
Updated inclusion amounts for leased vehicles apply to new lease terms beginning in 2023. The dollar amounts would continue to apply throughout the remainder of the lease.
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Slightly higher passenger vehicle depreciation limits in 2023 may help individual and business car buyers recoup more purchase costs and ongoing maintenance. To claim depreciation, owners must keep track of all vehicle expenses in addition to other steps. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Whipplewood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.
What Is the Standard Mileage Rate?
The standard mileage rate is established annually to be used when claiming a deduction for vehicle use. The rate varies based on how the vehicle was used including moving, medical, business reasons, or in serving a charitable organization. For medical or moving the rate remains at 22 cents per mile. In addition, the 14 cents per mile remains for vehicles used for charitable purposes.
These rates apply for gas-powered, diesel-powered, electric-powered, and hybrid automobiles. Not just limited to individuals, these tax credits also apply to corporations as well. The IRS offers a tax-free threshold for employers to employee reimbursements.
How is the Standard Mileage Rate Determined?
Motus, a leader in vehicle reimbursement solutions advises the IRS on business driving trends and provides them with extensive insights into vehicle ownership and usage over the course of the previous year. This information is then used to determine the annual rate.
The Actual Expense Method
However, there is another method that taxpayers can use to calculate eligible deductible miles called the actual expense method. It evens the playing field a bit for high-mileage drivers and those who live in places with a higher cost of living. It permits taxpayers to deduct the actual costs of using vehicles which includes gas, parts, repairs, and insurance.
It is important to note that other operating expenses such as parking fees, and tolls incurred for business use are separately deductible regardless of the selected method.
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The mileage rate increase is good news for Denver families and businesses that drive significant miles for eligible purposes. If you have questions about the information outlined above or have questions about how to capture this deduction, Whipplewood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.