Author: Robert K Valentine Jr.
If your business owns a high-end vehicle, you already know the IRS doesn’t let you write it off the way you would a delivery van or a piece of office equipment. Passenger automobiles are subject to special “luxury auto” depreciation limits under Section 280F of the tax code, and those limits apply even when you claim first-year bonus depreciation. Below, we walk through exactly how the calculation works, then apply it to a real-world example: a $100,000 Mercedes placed in service partway through 2025.
The Building Blocks: MACRS, Half-Year Convention, and Section 280F
Before working through the numbers, it helps to understand the three concepts that drive this calculation.
- MACRS (Modified Accelerated Cost Recovery System) is the standard depreciation method the IRS requires for most business property. Passenger automobiles are 5-year property under MACRS, depreciated using the 200% declining balance method.
- The Half-Year Convention assumes that any asset placed in service during the year was placed in service exactly halfway through the year, regardless of the actual date. That means a car placed in service in January and a car placed in service in November are both treated as if they went into service on July 1 for depreciation purposes — you get a half-year of depreciation in year one and a half-year of depreciation in the final year of the recovery period.
- Section 280F “Luxury Auto” Limits cap the total depreciation (including bonus depreciation) that can be claimed on a passenger automobile each year, no matter how expensive the car is or how much of the cost MACRS and bonus depreciation would otherwise allow. The IRS publishes new dollar limits every year based on the vehicle’s placed-in-service date.
These three rules work together. MACRS and bonus depreciation determine how much depreciation a vehicle would generate in a given year; Section 280F then caps that amount at a fixed dollar figure. For an expensive vehicle, the 280F cap is almost always the binding constraint — which is exactly what plays out in the example below.
Bonus Depreciation in 2025
Bonus depreciation under Section 168(k) allows a business to deduct a percentage of an asset’s cost immediately in the year it’s placed in service, on top of (or instead of) regular MACRS depreciation. The One Big Beautiful Bill Act (OBBBA), signed in July 2025, restored 100% bonus depreciation for qualifying property both acquired and placed in service after January 19, 2025 — reversing the phase-down schedule that had reduced bonus depreciation to 40% for 2025 under prior law. A vehicle purchased and placed in service in March 2025, as in our example, falls squarely within this window and is eligible for 100% bonus depreciation.
Even with 100% bonus depreciation, a passenger automobile’s first-year deduction is still capped by the Section 280F dollar limit for that year. Bonus depreciation determines how the deduction is characterized; it does not override the luxury auto cap.
The 2025 Luxury Auto Depreciation Limits
For passenger automobiles first placed in service in 2025, the IRS published the following maximum depreciation deductions in Rev. Proc. 2025-16 (assuming 100% business use):
| Recovery Year | Maximum Deduction (with bonus depreciation) |
|---|---|
| Year 1 (2025) | $20,200 |
| Year 2 (2026) | $19,600 |
| Year 3 (2027) | $11,800 |
| Year 4 and each year after | $7,060 |
Here’s the part many business owners miss: if the vehicle isn’t used 100% for business, these dollar limits must be reduced by the percentage of personal use. Only the business-use portion of the cost is depreciable in the first place, and the annual caps are prorated the same way.
Worked Example: $100,000 Mercedes, 80% Business Use
Let’s put this together with a concrete example.
- Vehicle cost: $100,000
- Placed in service: March 11, 2025
- Business use: 80%
- Depreciation method: MACRS, 5-year property
- Convention: Half-Year
- Bonus depreciation: Elected (100%)
- Section 179: Not claimed
Step 1: Determine the Depreciable Basis
Only the business-use percentage of the vehicle’s cost is depreciable:
$100,000 × 80% = $80,000 depreciable basis
Step 2: Apply 100% Bonus Depreciation, Subject to the 280F Cap
Because the vehicle was placed in service after January 19, 2025 and 100% bonus depreciation was elected, the entire $80,000 depreciable basis would ordinarily be deductible in 2025. However, the Section 280F cap for a 2025 passenger vehicle’s first year is $20,200, and that limit must be reduced to reflect the 80% business-use percentage:
$20,200 × 80% = $16,160 maximum first-year deduction
Since $16,160 is less than the $80,000 that bonus depreciation would otherwise allow, the deduction for 2025 is capped at $16,160.
Step 3: Recover the Remaining Basis in Later Years
The $63,840 of basis that couldn’t be deducted in 2025 because of the 280F cap isn’t lost — it’s simply recovered in future years, using that same year’s business-use-adjusted 280F limit, for as long as it takes to fully depreciate the vehicle. Because the annual caps are so much smaller than the vehicle’s cost, this stretches out well beyond the normal 6-year MACRS recovery period (5-year property, half-year convention):
| Tax Year | Recovery Year | 280F Limit (100% use) | Limit × 80% Business Use | Depreciation Deduction | Remaining Basis |
|---|---|---|---|---|---|
| 2025 | 1 | $20,200 | $16,160 | $16,160 | $63,840 |
| 2026 | 2 | $19,600 | $15,680 | $15,680 | $48,160 |
| 2027 | 3 | $11,800 | $9,440 | $9,440 | $38,720 |
| 2028 | 4 | $7,060 | $5,648 | $5,648 | $33,072 |
| 2029 | 5 | $7,060 | $5,648 | $5,648 | $27,424 |
| 2030 | 6 | $7,060 | $5,648 | $3,677.18 | $23,746.82 |
| 2031 | 7 | $7,060 | $5,648 | $5,648 | $18,098.82 |
| 2032 | 8 | $7,060 | $5,648 | $5,648 | $12,450.82 |
| 2033 | 9 | $7,060 | $5,648 | $5,648 | $6,802.82 |
| 2034 | 10 | $7,060 | $5,648 | $5,648 | $1,154.82 |
| 2035 | 11 | $7,060 | $5,648 | $1,154.82 (final year — remaining basis only) | $0 |
Notice that Year 4’s cap of $7,060 (adjusted to $5,648) continues to apply in Years 4, 5, 7, 8, 9, and 10. Year 6 is the exception: it’s the last year of the standard 6-year MACRS recovery schedule for 5-year property under the half-year convention, so the regular declining-balance calculation still applies that year — 5.76% of the $63,840 in basis carried over from Year 1, or $3,677.18 — and since that’s less than the $5,648 cap, the smaller amount governs. The cap resumes at $5,648 for Years 7 through 10, and the final year’s deduction (2035) is simply whatever basis is left, since the vehicle can’t be depreciated below zero.
The full $80,000 depreciable basis is eventually recovered, but it takes eleven tax years (2025 through 2035) instead of the one year that 100% bonus depreciation would suggest, and instead of the six-year MACRS recovery period the half-year convention would otherwise imply. This is the single biggest surprise for business owners who buy an expensive vehicle expecting to write off the full purchase price immediately: the Section 280F luxury auto cap, not MACRS or bonus depreciation, ends up controlling the timing.
Key Takeaways
- Luxury auto limits trump bonus depreciation. Even at 100% bonus depreciation, an expensive passenger vehicle’s first-year write-off is capped by Section 280F.
- Business-use percentage matters twice. It reduces both the depreciable basis and the annual dollar caps.
- Unrecovered basis carries forward indefinitely at the “Year 4 and later” rate until the vehicle is fully depreciated — there’s no limit on how many years this can take for a high-cost vehicle.
- Section 179 wasn’t used here, but it’s worth noting that many heavy SUVs and trucks over 6,000 lbs. GVWR are exempt from the 280F passenger-auto limits entirely and may allow for a much larger first-year deduction under Section 179 instead.
- If business use later drops to 50% or below, some of the depreciation claimed in earlier years may have to be “recaptured” as income — another reason to track business-use percentage carefully year to year.
This article is for general informational purposes only and does not constitute tax or legal advice. Depreciation limits are adjusted annually by the IRS and are subject to change; always confirm current-year figures and consult a qualified tax professional before applying these rules to your own vehicle purchase.
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