Tax Write-Off for Trucks, Vans and SUV's

Gregory J. Cook, EA, CPA+ Accredited Tax Advisor Past President Alabama Society of Enrolled Agents Past President Alabama Association of Accountants

"Depreciation deductions for most cars and trucks are limited by the "luxury car/passenger vehicle" limitations imposed by the IRS under Code Section 280(f). However, certain vans and trucks are not subject to this restricted write-off. Vehicles with a Gross Vehicle Weight Rating (GVWR) greater than 6,000 lbs. avoid these caps or limits and may be treated like 5 Year machinery and equipment".

If your truck or van exceeds 6,000 lbs in gross vehicle weight rating, the full depreciation deduction is allowed. You can even use the Section 179 expensing election and take up to $100,000 in the first year -- plus the regular depreciation deduction on the remaining balance.

President Bush signed a law on October 22, 2004 that closed "the SUV loophole". Now there is a $25,000 limit instead of the $100,000 limit on Sec. 179 write-off for Sport Utility Vehicles (SUV's).

How can you find out if the vehicle exceeds the 6,000 lb weight test? Take a look at the plate inside the driver-side door jam for (GVWR).

More good news if you lease the vehicle -- the lease inclusion tables do not apply if the weight limits are exceeded. So, you can write-off the entire lease costs (at the business use percentage) and not have to reduce your lease payments by the yearly lease inclusion limitation.



Car and Truck Expenses
If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. You generally can deduct either your actual expenses or the standard mileage rate.

Actual expenses. If you deduct actual expenses, you can deduct the cost of the following items: Depreciation, Lease payments
Rental fees, Garage rent, Licenses, Repairs, Gas, Oil, Tires,
Insurance, Parking fees and Tolls. If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. You can divide based on the miles driven for each purpose.

Example.
You are the sole proprietor of a flower shop. You drove your van 20,000 miles during the year. 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. You can claim only 80% (16,000 / 20,000) of the cost of operating your van as a business expense.

Standard mileage rate. Instead of figuring actual expenses, you may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. You can use the standard mileage rate for a vehicle you own or lease. The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. It is announced annually by the IRS. To figure your deduction, multiply your business miles by the standard mileage rate for the year.

Additional information. For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes.

Choosing the standard mileage rate. If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. In later years, you can choose to use the standard mileage rate or actual expenses.

If you want to use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period. For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire part of the lease period (including renewals) after that date.


Depreciation and Section 179 Deduction
Increased section 179 limits. The maximum section 179 deduction you can elect for qualified section 179 property placed in service in 2007 has increased to $125,000 ($160,000, for qualified zone and qualified renewal property). This limit is reduced by the amount by which the cost of qualified section 179 property placed in service during the tax year exceeds $500,000. For qualified section 179 Gulf Opportunity (Go) Zone property, the maximum section 179 deduction is higher than the deduction for most other section 179 property.

Section 179 Deduction
The section 179 deduction allows you to treat part or all of the business cost of a car as a current expense rather than taking depreciation deductions over a number of years.

The limit on total section 179 and depreciation deductions (discussed later) may reduce or eliminate any benefit from claiming the section 179 deduction.
You can claim the section 179 deduction only in the year you place the car in service. For this purpose, a car is placed in service when it is ready and available for a specific use, whether in a trade or business, a tax-exempt activity, a personal activity, or for the production of income. Even if you are not using the property, it is in service when it is ready and available for its specific use.

A car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business.

Example.
In 2006 you bought a new car and placed it in service for personal purposes. This year, you began to use it for business. Changing its use to business use does not qualify the cost of your car for a section 179 deduction this year. However, you can claim a depreciation deduction for the business use of the car. See Depreciation Deduction, later.

More than 50% business use requirement. You must use the property more than 50% for business to claim any section 179 deduction. If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. The result is the cost of the property that can qualify for the section 179 deduction.
Example.

Peter purchased a car in April 2007 for $19,500 and he used it 60% for business. The total cost of Peter's car that qualifies for the section 179 deduction is $11,700 ($19,500 cost x 60% business use). But see Limit on total section 179 and depreciation deductions, discussed later.

Limits.
 There are limits on: The amount of the section 179 deduction, the section 179 deduction for sport utility and certain other vehicles, and the total amount of the section 179 deduction plus the depreciation deduction you can claim for a qualified property.

Limit on the amount of the section 179 deduction. For 2007, the total amount you can choose to deduct under section 179 generally cannot be more than $125,000. If the cost of your qualifying section 179 property placed in service in 2007 is over $500,000, you must reduce the $125,000 dollar limit (but not below zero) by the amount of cost over $500,000. If the cost of your section 179 property placed in service during 2007 is $625,000 or more, you cannot take a section 179 deduction.

The total amount you can deduct under section 179 each year after you apply the limits listed above cannot be more than the taxable income from the active conduct of any trade or business during the year.
If you are married and file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service.

If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit. You must allocate the dollar limit (after any reduction) between you. For more information on the above section 179 deduction limits, see Publication 946.

Limit for sport utility and certain other vehicles. For sport utility and certain other vehicles placed in service in 2007, the portion of the vehicle's cost taken into account in figuring your section 179 deduction is limited to $25,000. This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is not subject to any of the passenger automobile limits and that is rated at no more than 14,000 pounds gross vehicle weight. However, the $25,000 limit does not apply to any vehicle:

Designed to have a seating capacity of more than nine persons behind the driver's seat, equipped with a cargo area of at least 6 feet in interior length that is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or that 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.

Limit on total section 179 and depreciation deductions. Generally, the total amount of section 179 and depreciation deductions that you can claim for a qualified car that you placed in service in 2007 is $3,060. The limit is reduced if your business use of the car is less than 100%. See Depreciation Limits, later, for more information.

Example.
In the earlier example under More than 50% business use requirement, Peter had a car with a qualifying cost (for purposes of the section 179 deduction) of $11,700. However, Peter's total section 179 and depreciation deduction is limited to $1,836 ($3,060 limit x 60% business use).

Cost of car. For purposes of the section 179 deduction, the cost of the car does not include any amount figured by reference to any other property held by you at any time. For example, if you buy (for cash and a trade-in) a new car to use in your business, your cost for purposes of the section 179 deduction does not include your adjusted basis in the car you trade in for the new car. Your cost includes only the cash you paid.

Basis of car for depreciation. The amount of the section 179 deduction reduces your basis in your car. If you choose the section 179 deduction, you must subtract the amount of the deduction from the cost of your car. The resulting amount is the basis in your car that you use to figure your depreciation deduction.

List of vehicles that qualify as 6,000 lb. GVWR or more:

BMW

X5 4.8is SUV

Cadillac

Escalade SUV

Escalade pickup

Chevrolet

Astro Passenger Van AWD

Avalanche pickup

Express Van (both cargo and passenger models)

Silverado pickup

Suburban SUV

Tahoe SUV

Trailblazer SUV extended models only

Dodge

Dakota Club Cab 4 door

Dakota Quad Cab 4 door

Durango SUV

Ram pickup

Sprinter van

Ford

Econoline E150 and E350

Excursion SUV

Expedition SUV

F150 pickup

F250 pickup

F350 pickup

GMC

Envoy SUV Denali

Safari Passenger Van AWD

Savana van (both cargo and passenger models)

Sierra pickup

Yukon SUV

Honda

Ridgeline pickup

Hummer

H1

H2

Infinity

QX56 SUV

Isuzu

Ascender SUV

Land Rover

LR3 SUV

Range Rover SUV

Lexus

GX470

LX470 SUV

Lincoln

Aviator SUV

Navigator SUV

Mercedes

G500 SUV

G55 AMG SUV

ML350 SUV

ML500 SUV

Nissan

Armada SUV

Titan pickup

Porsche

Cayenne SUV

Saab

9-7x SUV

Toyota

4Runner Limited V8 4WD SUV

4Runner Sport V8 4WD SUV

4Runner SR5 V8 4WD SUV

Land Cruiser SUV

Sequoia SUV

Tundra Access Cab

Tundra Double Cab

Volkswagen

Touareg SUV