New Tax Bill: Business Vehicle Deductions

Chris Wittich

For business owners with vehicles in their business the new tax bill has a few wrinkles that will affect how you treat those vehicles. There are two big items to discuss. The first is like-kind exchanges and the second is vehicle depreciation.

First up is the like-kind exchange. For years businesses have been able to swap vehicles in a like-kind exchange. You turn in your used vehicle for a trade-in allowance and you buy a new vehicle for the owners or employees to use. A like-kind exchange results in no gain on the swap and then you claim depreciation on the new vehicle based on the cash you put into that new vehicle.

For example, a $30k car that was depreciated to $5k is traded in for a $10k allowance. You put in $20k of cash (or a loan) to purchase a new vehicle worth $30k. With a like-kind exchange you recognize zero gain on the trade in of the first vehicle and your basis in the new vehicle is your $5k of remaining basis plus the $20k of cash, so you have a $25k of depreciable basis in the new vehicle.

The new tax bill removes the ability for every business to do a like-kind exchange with vehicles. The only property allowed to be used in a like-kind exchange is now real property, so all the vehicles are out. Let’s run through that example again without the use of a like-kind exchange.

You trade in your car that has $5k of basis for a $10k trade allowance. Without the like-kind exchange you end up with a $5k gain on the sale of your vehicle. For the new vehicle, you get the entire $30k as your depreciable basis because it’s treated as though you took the $10k of cash from the trade-in plus your $20k of cash. So far this seems bad. You end up with $5k of gain and your depreciable basis is $5k higher, which is a bad trade-off. But wait, there’s more!

Second part of the new tax bill that effects vehicles are the depreciation rules. They have changed the Section 280F limits on depreciating passenger vehicles. The new law just about quadruples the Sec 280F limitations, so in the first year it’s $10,000, second year is $16,000, third year is $9,600 and the remaining years are $5,760. Plus you get an extra $8,000 in the first year for bonus depreciation. That’s a big change which will allow you to take your extra basis in the new vehicle and depreciate it sooner, often capturing that extra basis all in the first year as depreciation.

The Sec 280F limit only applies to the passenger vehicles, larger trucks or SUVs that have a gross vehicle weight of 6,000 pounds or more are exempt from those limits. The new tax bill allows for 100% bonus depreciation so a truck or SUV that is over 6,000 pounds can be 100% deducted using bonus depreciation. That takes your addition depreciable basis in the new vehicle and immediately turns it into a tax deduction, which will offset the gain on the original trade in. The new 100% bonus depreciation is allowed for both new and used vehicles, another change from the past when only the new vehicles were allowed to use bonus depreciation.

Revisiting our example the old way, you had $25k of basis which was depreciable and now you have $5k of gain on the trade in with $30k depreciable. By claiming the entire $30k of basis with the 100% bonus depreciation you have a net deduction of $25k which was your basis in the old way.

There is certainly a lot to digest here with the numerous changes to how businesses handle vehicle costs. Overall it’s probably a positive change for business owners with the ability to claim more depreciation up front on your vehicles, but when they are big changes like this to the tax law there are always some hidden opportunities and challenges.


Section 280F limit

Old Way

New Tax Bill

Year 1
11,160 new vehicle

3,160 used vehicle

18,000 new or used vehicles
Year 2
5,100 16,000
Year 3
3,050 9,600
Year 4
1,875 5,760
Year 5
1,875 5,760


Documentation Quote


New Tax Bill: Mortgage Interest