When the Actual Expense Method is used, the amount written off during a
vehicle's first year depends on how depreciation is handled.
Depreciation is the percentage of an asset's value that
can be written off each year over its useful life. For example, for an
asset with a five-year useful life, one-fifth the cost
can be expensed each year for five years (when its value is zero, in
theory). Depreciation is unlike other expenses since you don't need to
spend that money in order to take the deduction.
The SUV Tax Write-off Rules Broke New Ground
Internal Revenue Service Code Section l79 lets a business write off the
purchase price of equipment the first year (up to a
total of $105,000). This code section eliminates the delay of
depreciating assets over a number of years. Passenger cars aren't
eligible for the equipment tax deduction. But trucks and SUVs are.
However, there was a $25,000 ceiling for trucks or SUVs, limiting how
much could be written off the first year.
A loophole in the $350-billion stimulus plan passed in 2003 removed the
$25,000 ceiling for SUVs. The large SUVS (over 6,000 pounds GVWR) were
considered trucks, not passenger vehicles. The amount expensed the first
year grew from a maximum of $25,000 to the full $105,000 in 2005.
Suddenly, being able to write the full purchase price off immediately
made the larger SUV a more attractive purchase. They gained an edge over
regular automobiles and smaller SUVs subject to customary depreciation
or the $25,000 ceiling.
Clever businesses owners (and auto dealers) rushed to take advantage of
the loophole. It fueled SUV sales and distorted the auto market.
Then Congress started to feel pressured for
passing a poorly-thought-out law that rewards people for buying more car
than they need and encourages gas guzzlers.
Congress passed another law that went into effect October 23, 2004, that
rolled back the SUV deduction from the $105,000 in 2005 to $25,000.
Unless a vehicle was placed in service before
that date, the higher figure didn't apply. Congress may feel that they
fixed this deduction, but there's been a lot of
lingering confusion and mixed messages.
One point that must be considered is the fact that depreciation
deductions for these heavy SUVs will always be greater than depreciation
deductions for regular cars or the smaller SUVs. For example, if a
Realtor were to purchase a $47,000 Escalade and use it 100% for
business, the entire $47,000 would be deductible
over the life of the vehicle. And $25,000 of that would be deductible
during the first year.
Compare that to the purchase of a $47,000 regular car, and the maximum
depreciation deduction over the first five years of business use equals
$15,000 to $16,000. In effect, all Congress has done is to decrease the
first-year write-off of these large SUVs.
A Tax Benefit Isn't Necessarily a Good Deal
As a former IRS agent and a tax consultant and tax seminar leader for 20
years, I routinely explain specific tax provisions. The SUV regulations
prove that just because a deduction is entirely legal, it still may not
make good business or tax sense. A business owner needs to pause and
wonder - besides the tax advantage, does this much vehicle make sense
for my business?
Tax savings aside, the large vehicles are much more expensive to buy and
operate than other automobiles. The cost of gas to drive them is
considerably greater. And that's a major concern as gas
prices ratchet ever higher. Then factor in the added sales tax, repairs
and insurance. Not such a good deal, any more is it?
Next consider those dollars you'd be spending for such a massive car.
You'd probably have a better return on your investment if they were
spent differently. This is one purchase that will probably haunt you
every time you fill the tank. And that one- shot tax savings will be far
from your mind.
CAUTION: Congress is currently considering reducing the $25,000
limitation on large SUVs down to approximately $3,000 in the first year.
This would put the deduction for the large SUVs on an even footing with
regular car depreciation. Any changes to
this $25,000 figure would probably be effective on the day the bill is
signed by the President, or possibly an effective start date of January
1, 2006. If you're going to buy one of these heavy vehicles, my advice
is sooner rather than later.
--Chris Bird Conducts 150 seminars a year for Real Estate and Financial
professionals Wealth building, financial planning, residential rentals,
tax strategies, accounting Certified
Financial Planner (CFP) IRS Enrolled Agent
Contact: Chris@ChrisBirdSeminars.com
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