IRS Rules to Write off Business Vehicles
By Houston TX CPA Jim Trippon, on the web at www.CPAHoustonTX.com
Business vehicles which can be classified under cars, SUV's, trucks and vans, can be used as effective tax instruments. There are two avenues for claiming tax relief in case you own a business vehicle: expensing under section 179 and depreciation. This tax benefit can be significant if you understand certain aspects of the new IRS rules to write off business vehicles.
The luxury vehicle depreciation limits
The reason why IRS began applying luxury limits to business vehicles is apparently because of the misuse of earlier laws where a vehicle could be written off in three years irrespective of its cost. Essentially business vehicles are subject to luxury limits if:
Your passenger car or vehicle has a gross weight of 6000 pounds or less
Your business truck or van is subject to the luxury limits because it has a gross vehicle weight rating (GVWR) of 6,000 pounds or less
Cross over vehicles or SUVs which are below 6000 pounds
Obviously, passenger cars seldom cross 6000 pounds and trucks or vans are usually above this weight. Business vehicles with GVWRs greater than 6,000 pounds purchased in 2009 qualify for Section 179 expensing. A limit of up to $25,000 on qualifying SUVs or crossover vehicles or $25000 on qualifying pickup trucks and vans is applicable.
In addition to the above limits, for those vehicles which are not coming under the luxury limit, a five year MACRS depreciation table becomes applicable which means you can write off the entire cost of the vehicle in five years.
For Passenger Autos not eligible for Section 179 expensing, the depreciation limit first tax year is $2,960. In case of new vehicle the bonus depreciation of 50% is added.
For Trucks and Vans not eligible for Section 179 expensing, the depreciation limit first tax year is $3,160, In case of new vehicle the bonus depreciation of 50% is added.
Clearly, the advantages of not being classified under luxury limits are significant. In case of new vehicle purchase a 50% additional bonus depreciation in the first year is applicable irrespective of the classification (within or outside the luxury limits).
From a casual reading of the rules, you can observe that vehicles classified under the luxury limits will never be able to depreciate quickly enough to make a profit on sale. Under such circumstances it is better to declare a loss after sale of your vehicle. You can claim tax benefits by showing Section 1231 ordinary loss deduction.
Alternatively, if are selling a vehicle which does not come under the luxury limits, you are liable to make a profit from sale (since you have already claimed full depreciation) and liable for tax in that particular year. Here it is advisable to defer your taxes by trading the car because by doing this you can claim tax-deferred 1031 exchange.
The tax implications of a business vehicle classified within and outside luxury limits are significantly different. You can save tax while replacing your business vehicle by either selling when it comes within the purview of luxury limits or by trading when outside the limits.
About the Author: Jim Trippon CPA is the founder of J.M. Trippon & Company, PC a CPA FIRM in Houston, Texas that works with Houston business owners and their families. For more information, or for help with accounting or tax reporting for your business, please contact Houston TX CPA Jim Trippon at 713-661-1040 or visit our website at www.CPAHoustonTX.com.