The IRS has updated its depreciation limits for business vehicles in 2025, and for the first time in three years, those limits have actually gone down. These changes, which adjust for inflation, impact how small businesses deduct vehicle expenses and manage their tax planning. Here’s what you need to know.
Lower Depreciation Limits for Purchased Vehicles
Each year, the IRS adjusts depreciation limits to keep up with economic trends. For passenger vehicles placed in service in 2025, the limits have dropped slightly compared to 2024:
- With First-Year Bonus Depreciation:
- Year 1: $20,200 ($200 lower than 2024)
- Year 2: $19,600 ($200 lower than 2024)
- Year 3: $11,800 ($100 lower than 2024)
- Each following year: $7,060 ($100 lower than 2024)
- Without First-Year Bonus Depreciation:
- Year 1: $12,200 ($200 lower than 2024)
- Later years: Same as above
For businesses that rely on vehicle deductions, this is a notable shift after years of steady increases.
What About Leased Vehicles?
If you lease a vehicle for business use, the IRS requires an income inclusion adjustment to balance tax treatment between owned and leased vehicles. The amount depends on the vehicle’s fair market value and lease duration. These updates help ensure fairness between different ownership structures.
Why Did the Limits Change?
The Bureau of Labor Statistics reports shifts in vehicle prices that have influenced these updates:
- Used car and truck prices rose 1% over the last year (not seasonally adjusted).
- New car prices dropped 0.3% in the same period.
With inflation and market adjustments, the IRS has lowered depreciation limits to reflect these changes.
What This Means for Small Business Owners
- Tax Planning Considerations: Deciding between purchasing or leasing? These new limits affect the tax advantages of each option. Work with your accountant to evaluate what’s best for your business.
- Compliance Awareness: If you lease a business vehicle, make sure you’re factoring in the required income inclusions to stay compliant with IRS rules.
- Budgeting for Vehicle Purchases: The depreciation limits directly impact cash flow planning, so business owners should adjust financial projections accordingly.
Thinking about purchasing or leasing a business vehicle in 2025? Understanding these IRS updates can help you maximize deductions and avoid surprises. Contact us today for expert guidance on tax planning and vehicle expense deductions for your business.