Can bonus depreciation be claimed on luxury vehicles used in a car rental business?
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Yes, bonus depreciation can generally be claimed on luxury vehicles used in a car rental business, but there are important limitations and requirements to consider.
1. Eligibility for Bonus Depreciation
Bonus depreciation under IRC §168(k) allows for an immediate deduction of a percentage of the cost of qualifying property, including vehicles, in the year the property is placed in service. For 2025, the bonus depreciation rate is 100% for property acquired and placed in service after January 19, 2025, due to recent legislative changes.
To qualify for bonus depreciation, the property must:- Be tangible property with a recovery period of 20 years or less under MACRS,- Be new or used (if certain requirements are met),- Be acquired and placed in service within the applicable timeframes,- Not be required to be depreciated under the Alternative Depreciation System (ADS), unless specifically allowed.
2. Application to Luxury Vehicles
A "luxury vehicle" for tax purposes is a passenger automobile subject to the annual depreciation limits of IRC §280F(a). However, vehicles used in a car rental business are treated differently.
a. Vehicles Used in a Car Rental Business
Under IRC §280F(d)(1), the annual depreciation caps for "luxury automobiles" do not apply to vehicles used in a business of leasing (including car rental businesses), provided the taxpayer is regularly engaged in the business of leasing such vehicles to others.
- This means that the annual dollar limits on depreciation deductions (which otherwise severely restrict first-year write-offs for luxury vehicles) do not apply to vehicles held for lease or rental in a bona fide car rental business.
- As a result, the full cost of the vehicle (subject to bonus depreciation rules) can be depreciated, including via bonus depreciation, in the year the vehicle is placed in service.
b. Listed Property and Business Use
Vehicles are considered "listed property" under IRC §280F(d)(4), which means that substantiation and business use requirements apply. However, for vehicles held for lease or rental to customers in a car rental business, the business use is generally considered to be 100%, provided the vehicle is not used for personal purposes by the owner or employees.
3. Bonus Depreciation Calculation
- For vehicles acquired and placed in service after January 19, 2025, 100% bonus depreciation is available.
- The deduction is taken after any Section 179 expensing (if elected), but before regular MACRS depreciation.
- There is no annual dollar cap for bonus depreciation, and the luxury auto limits do not apply to rental vehicles.
4. Exceptions and Caveats
- If the vehicle is not used exclusively in the rental business (e.g., significant personal use by the owner or employees), the exception to the luxury auto limits may not apply, and bonus depreciation could be limited.
- Proper substantiation of business use and records of rental activity are required.
- If the vehicle is used in a trade or business that is not a bona fide car rental or leasing business, the luxury auto limits would apply, and bonus depreciation would be subject to those caps.
5. Recapture
If the vehicle is later converted to personal use or sold, any excess depreciation (including bonus depreciation) may be subject to recapture as ordinary income under IRC §1245.
Summary: Bonus depreciation can be claimed on luxury vehicles used in a bona fide car rental business, and the annual depreciation caps for luxury automobiles do not apply to such vehicles. This allows for full expensing of the vehicle's cost (subject to bonus depreciation rules) in the year placed in service, provided the vehicle is used exclusively in the rental business and all substantiation requirements are met.
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