OUR THOUGHTS ON:

Like-Kind Exchanges Are No More For Vehicles. Don't Panic - Bonus Depreciation and Luxury Auto Limits Have Increased

Automobile|Tax|Tax Reform

By Brett Cubellis

The 2017 Tax Cuts and Jobs Act (TCJA) made significant changes to the property eligible for tax-free treatment in like-kind exchange transactions under IRC Sec. 1031. Under previous law, non recognition of gain applied to like-kind exchanges of (1) depreciable tangible personal property; (2) intangible or non depreciable personal property; and (3) real property.  After December 31, 2017, like-kind exchanges, and thus deferred gain treatment, will only be allowed for exchanges of real property not primarily held for sale. Exchanges of personal property, most notably automobiles, will no longer qualify for like-kind exchange treatment; those exchanges now result in taxable gain or loss in the year of exchange. 

This new TCJA like-kind exchange restriction has many companies worried about purchasing new vehicles, as the tax-free benefit on the gain of the trade in is now lost. We are here to tell you – don’t panic! There are depreciation provisions in the TCJA that will help counter the loss of like-kind exchange benefits, some of which are very specific to automobiles. Often, these new provisions will actually result in a greater year-one tax savings on automobiles than previously received with like-kind exchange treatment.

The TCJA increased the bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The new law also expanded the definition of what property qualifies for 100% bonus depreciation. Prior to the TCJA, used property was not eligible for bonus depreciation. However, after Sept. 27, 2017, property acquired in used condition but of first use to the taxpayer will generally qualify for 100% bonus depreciation (i.e., full expensing).

The new law also increased depreciation limits for passenger automobiles placed in service after Dec. 31, 2017. For the purpose of the depreciation caps, a passenger automobile includes any four-wheeled vehicle manufactured primarily for use on public streets, roads and highways that has an unloaded gross vehicle rating (GVWR) of 6,000 pounds or less (IRC Sec. 280F (d)(5)(A)). The table below shows the increase in depreciation allowed on passenger automobiles under the TCJA.

 

First Yr. Depreciation

Later Yrs. Depreciation

Date Placed in Service

No Bonus

  Bonus

Yr. 2

Yr. 3

Yr. 4 to End

2018 - Cars, Light SUVs, Trucks & Vans (New Law)

 $     10,000

 $     18,000

 $     16,000

 $       9,600

 $       5,760

 

       

 

2017 - Cars (Prior Law)

 $       3,160

 $     11,160

 $       5,100

 $       3,050

 $       1,875

2017 - Light SUVs, Trucks & Vans (Prior Law)

 $       3,560

 $     11,560

 $       5,700

 $       3,350

 $       2,075

Vehicles with a GVWR greater than 6,000 pounds are not subject to these depreciation limits mentioned. Therefore, in many cases the switch from 50% to 100% bonus depreciation on these heavy vehicles will allow for a full tax write-off at the time of purchase.

To demonstrate how the TCJA like-kind exchange and depreciation provisions will impact your business and leave you with no reason to panic, please consult your Schneider Downs advisor.

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The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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