October, 2003 Tax Tip
An SUV May Make You a Happy Tax Camper
This month's newsletter discusses the tax advantages of a sport utility vehicle ("SUV") over a regular passenger vehicle when it is used in a business. Current tax law limits annual depreciation deductions for passenger cars under "luxury car" provisions.
Generally a vehicle is defined as a passenger car if its unloaded gross vehicle weight is 6,000 pounds or less. The vast majority of cars fit within this definition and, therefore, are subject to the annual depreciation limitations. However, for SUV's, trucks (including pickups) or vans the unloaded gross vehicle weight rule is ignored and a special rule "gross vehicle weight" (GVW) is used instead. SUVs are treated as passenger cars only when the manufacturer's maximum loaded weight rating for the vehicle is 6,000 pounds or less. As a result, several SUV's (such as the Cadillac Escapade, Chevy Suburban, Lexus LX470 and Lincoln Navigator) are heavy enough to escape the definition of a passenger auto. The weight of a vehicle is usually shown on a plate or sticker somewhere on the inside of the driver's door.
If a vehicle is not classified as a passenger automobile, there is no annual limitation on depreciation.
For 2003, the maximum depreciation that can be claimed in the first year for a new passenger car depends upon when it was purchased. If purchased before May 6, 2003, the maximum is $7,660 no matter what the cost of the car. If purchased after May 5, 2003 (but before January 1, 2005), the maximum is increased to $10,710. However, you can get a much larger deduction for an SUV. For example, if you purchase an SUV costing $50,000 – the first year write-off could be the entire $50,000 cost of the vehicle, assuming 100% business use. CAVEAT: If you do not use the vehicle in your business for the prescribed number of years established by IRS depreciation tables, or if you reduce the business use, you may be required to take back into income a portion of the tax benefit you previously received.
You could claim a proportionate deduction for the SUV so long as you use it more than 50% for business. But if your SUV weighs in at less than 6,000 Gross Vehicle Weight, as would be the case with a Chevy Blazer or Ford Explorer, your deduction would be limited to the passenger car amounts stated above.
The following vehicles are subject to annual depreciation limitations:
A passenger automobile vehicle with an unloaded vehicle weight of 6,000 pounds or less.
A truck, van or SUV with a gross vehicle weight rating of 6,000 pounds or less.
The following are NOT subject to annual depreciation limitations:
A passenger automobile vehicle with an unloaded vehicle weight of more than 6,000 pounds.
A truck, van or SUV with a gross vehicle weight rating of more than 6,000 pounds.
If you can't afford to purchase an SUV with a Gross Vehicle Weight of more than 6,000 pounds or you don't want to drive an SUV for business, the best tax benefits may come from leasing your car.
The business deductions for a leased passenger automobile are normally reduced by a nominal IRS-calculated income inclusion amount. Here you will be able to deduct almost all of your lease payment and get a better tax break than if you owned the car. However, a vehicle that's not a "passenger auto" is exempt from the inclusion adjustment. Thus, with a heavy truck, van, or sport utility vehicle, you can deduct the full business percentage of the lease payments if the vehicle is used more than 50% of the time for qualified business purposes.
As any business vehicle can be depreciated over time, the obvious tax benefits of SUV's is the ability to deduct major amounts of the cost on the front end. You should always consider the greater costs of operating an SUV when making the decision to buy one for the fast write-offs.
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