Deducting Auto Expenses & Luxury Auto Limits
When you use a vehicle for business purposes, you can deduct the business portion of the operating expenses on your business. If you use the car for both business and personal purposes, you may deduct only the cost of its business use. You can generally determine the expense for the business use of your car in one of two ways, the standard mileage rate method or the actual expense method.
Standard Mileage Rate Method
The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance, and depreciation (or lease) expenses. The rate varies from year to year and for 2008, the standard mileage rate is 50.5 cents per mile. In addition the cost of business-related parking and tolls is deductible. Caution: If you don’t use the standard mileage rate in the first year the vehicle is placed in service, you cannot use it in future years. If in a subsequent year you switch to the actual method, you must use the straight-line method for depreciation. If the car is leased, you must continue to use the standard mileage rate in future years.
Actual Expenses Method
To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible. Both methods can include interest paid on the car loan when deducted on business returns. How ever, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions. Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.”
The depreciation deduction for luxury vehicles has an annual limit which generally changes slightly for each tax year. However, with the passage of the Economic Stimulus Act, bonus depreciation will be allowed for 2008. As a result, the maximum first-year deduction of passenger vehicles, van and small trucks is increased by an added 8,000. Thus, for vehicles placed in service during 2008, the first year limit is $10,960 ($11,160 for small trucks and vans).
In an effort to reign in the practice of purchasing SUVs as a tax shelter, Congress has placed limit of $25,000 on the §179 deduction for certain vehicles. The limit applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver’s seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.
In addition to the Section 179 deduction for 2008, taxpayers can also apply the 50% bonus depreciation, which is allowed for 2008 only. Combining the $25,000 Sec. 179 deduction with the new 50% bonus depreciation and the regular depreciation on the balance can provide a huge first-year write-off in 2008. The following is a representative example (assuming 100% business use):
On Feb. 12, 2008, the Democratic House leadership introduced H.R. 5351, the “Renewable Energy and
Energy Conservation Tax Act of 2008.” Effective for property placed in service after its enactment
date, this bill as introduced would erase the current tax preference for heavy SUVs by subjecting all
SUVs with a GVW of over 6,000 pounds to 14,000 pounds to the annual Code Sec. 280F luxury auto
depreciation and expensing limits. The bill also would repeal the special $25,000 heavy SUV expensing
limit in Code Sec. 179(b)(6). Thus, if the bill becomes law, the first-year write-off for heavy SUVs
bought and placed in service in 2008 after its enactment date would be capped at $11,260 (and at $3,260
in 2009, assuming there’s no adjustment in the first-year allowance for trucks or vans placed in service
in 2008 or 2009).
If you are planning to buy an SUV based on this big write-off, be sure to call first to see the status of the legislation. Congress tried last year to limit the write-off for SUVs, but the legislation did not pass partly because Congress is sensitive to the negative effect it would have on U.S. car makers. So, it is wait and see!
E Thomas Associates Inc. is a registered investment advisor in Kentucky.
Dave Smith & Tony King are Registered Representatives of and securities are offered through Dalton Strategic Investment Services, Inc., member FINRA & SIPC. 6408 River's Edge Rd, Greenville, OH 45331
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