Would you rather drive this car?
Or would you rather drive this car?
by Ken Smith
Passenger vehicles used for business provide less tax savings than SUVs and Larger Vehicles for three reasons (in addition to the price tag)
IRC Section 280F(a) contains luxury auto depreciation limitations that apply to cars, light trucks, and light vans used for business.
For these vehicles placed in service during 2016, the maximum annual depreciation deductions are:
Maximum Depreciation First Six Years
Auto vs. Large Truck
AUTO LARGE TRUCK
Year 1 $3,160.00 Year 1 $3,560.00
Year 2 $5,100.00 Year 2 $5,700.00
Year 3 $3,050.00 Year 3 $3,350.00
Year 4 $1,875.00 Year 4 $2,075.00
Year 5 $1,875.00 Year 5 $2,075.00
Year 6 $1,875.00 Year 6 $2,075.00
Total $16,935.00 Total $18,835.00
I want to emphasize that you must use the vehicle more than 50% in order to get these great deductions. Remember that when vehicles are used less than 100% for business, the numbers shown above are reduced by the percentage of business use that is less than 100%.for business.
Also remember that you must maintain written documentation of mileage. The IRS requires a written log of the business and non-business mileage driven.
Larger vehicles (those that weigh more than 6,000 pounds) provide larger tax savings. Greater tax savings are made possible because the luxury auto depreciation limitations apply only to “passenger automobiles” as defined by the Tax Code [IRC Sec. 280F(a)(1)(A)]. When a vehicle weighs more than 6,000 pounds and is used over 50% for business, it is treated as five-year MACRS property and falls under the “regular” depreciation rules.
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The more favorable depreciation rules for large vehicles provide for faster depreciation and larger tax savings for owners equal to the following percentages of the business-use portion of the vehicle’s basis: Year 1 20.00%, Year 2 32.00%, Year 3 19.20%, Year 4 11.52%, Year 5 11.52%, Year 6 5.76%
Larger vehicles also qualify for the Section 179 accelerated depreciation deduction and for first-year “Bonus Depreciation” for new vehicles in years when bonus depreciation is allowed.
Remember that the tax-saving strategy is to buy a vehicle heavier than the passenger auto classification. Specifically, a passenger vehicle is not considered to be a passenger auto if it has a gross vehicle weight rating of more than 6,000 pounds.
Passenger vehicles that meet the 6,000 pound “heavy” definition are considered trucks for depreciation purposes. One caution is that the Section 179 Deduction for Heavy SUVs is subject to a $25,000 limit for heavy SUVs with gross vehicle weight ratings between 6,001 and 14,000 pounds.
There is no $25,000 limitation on vehicles that are not considered to be SUVs. Non-SUVs must meet a series of detailed and specific standards to qualify for the most favorable depreciation treatment. Schedule an appointment with the experts at The Abrix Group L.P. for more details and assistance in choosing a large vehicle which will meet the Non-SUV large vehicle standard.
To summarize, passenger autos fall under the small luxury auto depreciation limits. Larger vehicles qualify for the Section 179 deduction, Bonus Depreciation, and faster 5-year MACRS depreciation. The deduction is generous but you must keep a mileage log of the business use percentage in order to claim the deduction.
In conclusion, despite the often complex definitions and sometimes confusing limitations on heavy vehicles used for business, consulting your Abrix Group L.P. representative can result in great tax planning opportunities that result in significant tax savings when structured appropriately.
To schedule an appointment to implement this strategy and others within the context of your unique tax situation, Contact your representative at The Abrix Group L.P. at (847)498-8900.
About the author: Ken Smith is an Enrolled Agent and Accountant with The Abrix Group L.P. He can be reached at 847-498-8900 or email@example.com The Abrix Group L.P. has been a leader in healthcare business management, tax, and accounting for over 50 years. We understand the complex structure of the medical and dental professions, as well as the diverse requirements of each practitioner’s business and personal needs. By combining our experience and expertise with a commitment to client service, The Abrix Group, L.P. assures that every client receives the close analysis and attention they deserve. Contact your Abrix representative for assistance. We’d love to hear from you!