Whether their business has one company car or a fleet of vehicles, many business owners find company-owned passenger vehicles to be an indispensible tool for running their businesses. Purchasing or leasing a vehicle can be a large expense, but this expense can be somewhat mitigated by depreciating the vehicle over the first several years that it is in service. The limits for how much of this expense can be depreciated each year is dictated by the government and revised annually for inflation.
As expected, the IRS recently issued its annual inflation-adjusted update of depreciation limitations for passenger automobiles (including passenger vans and trucks) placed in service in 2021. They also updated income inclusion amounts by lessees of passenger automobiles for vehicles with lease terms beginning in 2021.
For passenger automobiles to which the bonus first-year depreciation deduction applies and that are acquired after September 27, 2017, and placed in service during calendar year 2021, the depreciation limit is $18,200 for the first tax year (an increase of $100 from 2020); $16,400 for the second tax year (an increase of $300); $9,800 for the third tax year (an increase of $100); and $5,860 for each succeeding year (an increase of $100).
If bonus first-year depreciation does not apply, the depreciation limit for passenger automobiles is $10,200 for the first tax year; $16,400 for the second tax year; $9,800 for the third tax year; and $5,860 for each succeeding year.
The IRS limits deductions for the cost of leasing automobiles, expressed as an income inclusion amount. This limitation is intended to be substantially equivalent to the depreciation limitation. If your business is affected by this income inclusion amount, please refer to table 3 of Rev. Proc. 2021-31 which provides income inclusion dollar amounts for lessees of passenger automobiles with a lease term beginning 2021.