If you use a vehicle for business purposes, you may be eligible to deduct part of its cost through depreciation. Each year, the IRS sets specific limits on the amount of depreciation that can be claimed, especially for passenger vehicles. For 2024, there are updated car depreciation limits that business owners, freelancers, and anyone using a vehicle for work should be aware of. Here’s a breakdown of the key changes and what they mean for you.
1. What is Car Depreciation?
Car depreciation refers to the process of deducting the cost of a vehicle used for business purposes over time, rather than all at once in the year of purchase. This deduction accounts for the wear and tear a vehicle undergoes as it is used in your business. The IRS sets limits on how much depreciation can be claimed annually for vehicles, especially those used for both business and personal purposes.
2. 2024 Depreciation Limits for Passenger Vehicles
For vehicles placed in service during 2024, the IRS has set the following depreciation limits:
- First year: $20,200 (including bonus depreciation).
- Second year: $18,000.
- Third year: $10,800.
- Each subsequent year: $6,460.
These limits apply to passenger cars, trucks, and vans weighing less than 6,000 pounds. Vehicles weighing more than 6,000 pounds may qualify for more generous depreciation allowances.
3. Bonus Depreciation
Bonus depreciation allows businesses to deduct a larger percentage of the vehicle’s cost in the first year of service. For 2024, the bonus depreciation percentage remains at 80%, down from 100% in previous years. This applies to both new and used vehicles that meet IRS qualifications. The first-year limit of $20,200 includes the bonus depreciation, which can significantly reduce your taxable income if you purchase a vehicle for business use.
4. Section 179 Deduction
The Section 179 deduction allows businesses to expense part or all of the cost of a business vehicle in the year of purchase. In 2024, the Section 179 deduction limit for SUVs, trucks, and vans weighing between 6,000 and 14,000 pounds is capped at $28,900. This allows businesses to deduct a significant portion of the vehicle’s cost upfront, as long as it is used more than 50% for business purposes.
It’s important to note that Section 179 cannot be used for vehicles considered “luxury cars” under IRS rules, which generally refers to most passenger vehicles weighing less than 6,000 pounds. For these vehicles, you must follow the annual depreciation limits.
5. Luxury Vehicle Depreciation Caps
Vehicles considered luxury cars are subject to specific depreciation caps. These limits are set to prevent excessive deductions for high-end vehicles that might be used for personal enjoyment. The limits mentioned above ($20,200 for the first year) are specifically applied to luxury cars, so it’s crucial to ensure your vehicle falls under this category if you’re considering purchasing a high-value vehicle for business use.
6. Depreciation for Electric and Hybrid Vehicles
Electric and hybrid vehicles are subject to the same depreciation limits as traditional gas-powered cars. However, businesses may be eligible for federal and state tax incentives or credits for purchasing electric vehicles, which can further reduce the cost of ownership. These incentives, while separate from depreciation, are worth exploring if you’re considering adding an electric vehicle to your fleet in 2024.
7. How to Maximize Your Depreciation Deduction
- Track business vs. personal use: To maximize your deduction, ensure you accurately track the percentage of time the vehicle is used for business purposes. Only the business portion of your vehicle’s cost is eligible for depreciation.
- Consider both Section 179 and bonus depreciation: Depending on the type of vehicle and your business needs, a combination of Section 179 and bonus depreciation can help you maximize your deductions.
- Stay within limits: Be aware of the depreciation caps set by the IRS to avoid claiming excessive deductions and triggering audits or penalties.
Conclusion
The 2024 car depreciation limits provide a valuable opportunity for business owners to deduct part of the cost of their vehicles over time. However, understanding the limits, especially for luxury vehicles and the impact of bonus depreciation, is crucial for effective tax planning. Always consult a tax professional to ensure you’re fully maximizing your available deductions and staying compliant with IRS rules.
