• Avoiding Luxury Auto Depreciation Limits
  • November 17, 2003 | Author: Jack S. Johal
  • Law Firm: Hanson Bridgett LLP - San Francisco Office
  • As you know, unfavorable depreciation rules apply to most passenger autos and light trucks used in business. For a vehicle acquired in 2002 at a cost exceeding $15,300, depreciation deductions are generally limited to the following amounts:

    Year 1 $3,060
    Year 2 $4,900
    Year 3 $2,950
    Year 4 and thereafter until cost is recovered $1,775

    If the business use percentage is less than 100% (which is often the case), your deductions are even smaller. You must multiply the above numbers by the business percentage.

    Despite these rules, there are ways to accelerate your tax write-offs relative to business vehicles. In particular, there are two situations that can counter these otherwise restrictive depreciation rules.

    Special Rules for New Vehicles. For new vehicles purchased after September 10, 2001, taxpayers can claim up to an additional $4,600 of first year depreciation, thus increasing the 2002 limit from $3,060 to $7,660. The key is that the vehicle must be new (rather than used). Like the regular auto depreciation rules, the allowable deduction is reduced when business use is less than 100%.

    Exception for Certain Trucks, Vans, and Sport Utility Vehicles (SUVs). Certain trucks, vans, and SUVs qualify for much more favorable depreciation rules. The key is finding a vehicle that is not considered a "passenger auto" under the tax rules.

    According to IRS regulations, a truck, van, or SUV is not a passenger auto when it has a Gross Vehicle Weight Rating (GVWR) (the manufacturer's maximum weight rating when loaded) above 6,000 pounds. On the second page of this newsletter, we've listed many of the 2003 vehicle models that qualify for these special tax benefits based on their GVWRs at the time we checked them. As you will note, it's a surprisingly long list. In addition, there may be some vehicles we have missed (new and retooled models are coming out all the time). Thus, always verify the GVWR for yourself before making a buying decision. The GVWR can normally be found on a label attached to the inside edge of the driver's side door.

    When such a vehicle is used more than 50% for business, you may be able to deduct up to $24,000 this year. The remaining cost can then be recovered over five years and may be eligible for the 30% first-year bonus depreciation.

    For example, if you spend $40,000 on a new heavy SUV that has a gross vehicle weight above 6,000 pounds and is used 100% for business, the entire $40,000 cost can be depreciated over several years; however, by claiming the maximum $24,000 Section 179 deduction and the special 30% first-year bonus depreciation on the vehicle, your total deduction in the first year can be more than $31,000. The remaining $9,000 of cost is depreciated over a five-year period. That is a significant tax advantage when compared to the rules that apply to normal passenger vehicles.

    Leasing Vehicles. Heavy trucks, vans, and SUVs are also exempt from the IRS lease add-backs, which can reduce deductions for normal passenger vehicles. With these vehicles, you can deduct the full business percentage of the lease payments.

    Heavy trucks, vans, and SUVs are also exempt from the 10% luxury auto excise tax. For "normal" passenger vehicles, this tax is 3% of the price in excess of $40,000 (adjusted annually for inflation) for vehicles purchased in 2002.

    2003 Model Vehicles with Gross Vehicle Weight Ratings (GVWRs) of More Than 6,000 Pounds

    X5 SUV

    Escalade SUV, Escalade EXT

    Astro Passenger Van AWD, Avalanche Pickup, Express Van, Silverado Pickup, Suburban SUV, Tahoe SUV, TrailBlazer EXT LT

    Durango SUV, Ram Van, Ram Wagon, Ram 1500 Pickup, Ram 2500 Pickup, Ram 3500 Pickup

    Excursion SUV, Expedition SUV, Econoline (E150, E250, and E350) Van, Econoline Wagon, F150 Pickup, F250 Pickup, F350 Pickup

    Safari Passenger Van AWD, Savana Van, Sierra Pickup, Sierra Denali, Yukon (including XL and Denali) SUV

    H2 SUV

    Land Rover
    Discovery SUV, Range Rover SUV

    LX470 SUV

    Blackwood Pickup (2002 model), Navigator SUV

    M-class SUV (ML 320, ML 500, ML55 AMG)

    Land Cruiser SUV, Sequoia SUV, Tundra Pickup (Limited models)