The Tax Blotter – March 2023

The Tax Blotter highlights recent federal income tax news.

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Generally, small business owners who use their automobile for business driving are entitled to deduct expenses based on the vehicle’s use, but there are plenty of twists and turns along the way.

Max out deductions. Although you can write off the cost of your passenger vehicle used for business purposes under Section 179, the deduction is limited by “luxury car” rules. Fortunately, recent legislation has increased the limits, subject to inflation indexing. For passenger cars placed in service in 2023, the first-year limit is $20,200. The figures are $19,500 for the second year and $ 11,700 in the third year. Then, for each succeeding year, the limit is $6,960. These numbers incorporate the bonus depreciation tax break (Rev. Proc. 2023-114, 1/18/23).

Drive a tax bargain. Thanks to a special tax break, a heavy-duty vehicle with a gross weight rating (GWR) over 6,000 pounds, like certain SUVs, is exempt from the usual luxury car limits. Instead, the tax law caps the maximum deduction at $25,000. Furthermore, the remainder of the cost is eligible for first-year bonus depreciation and any excess can be written off under the regular depreciation rules. Even better: For certain large pickup trucks, you may be able to write off 100% of the cost, subject to Section 179 limits.

Use a tax short-cut? The IRS imposes strict recordkeeping requirements for business vehicles, but you can take a tax short-cut where you don’t have to account for every expense. Alternatively, you may be able to use the IRS-approved standard mileage rate deduction of 65.5 cents per business mile plus any business-related tolls and parking fees in 2023 (Notice 2023-03, 12.29.22). For example, if you drive 10,000 business miles this year and incur $500 in parking fees, you can deduct $7,050. Caveat: The actual expenses method generally produces a bigger deduction.