IRS Announces 2021 Automobile Depreciation Deduction Limits and Inclusion Amounts

The IRS has introduced the 2021 inflation-adjusted Code § 280F “luxurious car” limits on sure deductions which may be taken by taxpayers utilizing passenger cars (together with vans and vans) in a commerce or enterprise. For bought cars, the bounds cap the taxpayer’s depreciation deduction. For leased cars, the bounds cut back the taxpayer’s lease expense deduction by an “inclusion quantity” that’s calculated to make the lease deduction considerably equal to the depreciation deduction that may have been accessible if the auto had been bought.

The depreciation limits and inclusion quantities for passenger cars {that a} taxpayer first locations in service or first leases throughout calendar 12 months 2021 are offered in three tables. There are two depreciation-limit tables—one for cars acquired after September 27, 2017, that make the most of the extra first-year depreciation deduction underneath Code § 168(okay), and one other for cars for which no extra first-year depreciation deduction shall be taken. The third desk offers inclusion quantities for leased passenger cars with a good market worth exceeding $51,000. (This threshold is a rise of $1,000 from the brink that utilized in 2020; lots of the different values within the desk differ from the 2020 quantities as effectively (see our Checkpoint article).)

EBIA Remark: The price of buying and sustaining an organization automobile for an worker could qualify as a deductible expense for the employer (which, in that case, is the taxpayer for functions of this income process). The Tax Cuts and Jobs Act considerably elevated the utmost depreciation deductions for passenger cars and prolonged the extra first-year depreciation restrict (typically known as “bonus depreciation”), however the Code’s deduction limits and revenue inclusion quantities can nonetheless considerably cut back an employer’s precise tax deductions. Whereas not talked about on this steerage, employers offering firm automobiles should additionally take into account the impact of Code § 274(l), which disallows any deduction for bills referring to journey between an worker’s residence and place of employment (see our Checkpoint article). For extra info, see EBIA’s Fringe Benefits handbook at Part IV.B (“What Are the Tax Penalties of a Firm Automobile?”).

Contributing Editors: EBIA Employees.

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