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The IRS places restrictions on the amount of depreciation taxpayers can deduct for passenger automobiles used in a trade or business. These restrictions, however, do not apply to light trucks and vans that have a gross loaded weight or cars with a gross curb (unloaded) weight of over 6,000 pounds.
Seling The Tax Benefits - GVW More Than 6,000 LBS.
Certain new and used vehicles weighing over 6,000 pounds have attractive tax advantages for business owners. The tax laws allow certain taxpayers to deduct 100% of the purchase price as first year bonus depreciation on qualifying assets (only certain new assets qualify) purchased for use in a trade or business after September 8, 2010 and before January 1, 2012. The tax law also allows taxpayers to expense (section 179) up to $500,000 of qualifying assets (new and used assets qualify) in the year they are purchased. Note: Section 179 for SUVs is limited to $25,000. However, section 179 deductions are phased out once qualifying property and equipment additions exceed $2,000,000. The deduction is completely phased out when total qualifying additions equal $2,500,000.
This means the average taxpayer can purchase qualifying new and used vehicles for use in his or her trade or business and potentially realize the tax benefits immediately:
Example 1**
Purchase price of new or used vehicle |
$50,000 |
| First year section 179 expense |
($50,000) |
| Remaining purchase price depreciated over 5 years |
$ -0- |
Assuming an effective tax rate of 35%, the current year tax benefits would be $17,500.
Example 2**
Purchase price of new vehicles
|
$1,000,000 |
Purchase price of used vehicles
|
$1,000,000 |
Total Purchase Price
|
$2,000,000 |
| |
|
First year section 179 expense*
|
($500,000) |
| |
$1,500,000 |
| |
|
First year bonus depreciation (100%, new vehicles only)
|
($1,000,000) |
| |
$500,000 |
| |
|
First year MACRS depreciation (20%)
|
($100,000) |
Remaining purchase price depreciated over 5 years |
$ 400,000 |
| |
|
| Total first year expense |
$1,600,000 |
| |
|
*This deduction will begin to phase out if qualifying property and equipment additions exceed $2,000,000.
Assuming an effective tax rate of 35%, the current year tax benefits would be $560,000.
The key to selling these tax benefits is for your sales people to understand which vehicles qualify for this favorable tax treatment. Once they have identified the vehicles and a prospect, they can "feature and benefit" the tax law. Websites such as www.carsdirect.com/research and www.intellichoice.com are good resources for determining the weight of a particular vehicle. Nearly all cars are subject to the depreciation limitations because they weigh less than 6,000 pounds. The only exceptions appear to be those equipped with armor protection packages or limousine type vehicles that are not otherwise exempt from the limitations.
Selling The Tax Benefits - GVW Less Than 6,000 LBS.
Even if you cannot sell your customer a new vehicle weighing more than 6,000 pounds, there are still income tax benefits to buying a new vehicle under the tax law. For vehicles acquired after September 8, 2010, the depreciation deduction for trucks (including SUVs) and vans weighing less than 6,000 pounds that qualify for bonus depreciation will equal $11,060 in the first year, $4,900 in the second year, $2,950 in the third year and $1,775 in the fourth year and every year thereafter until they are fully depreciated. The depreciation deduction for cars weighing less than 6,000 pounds that qualify for bonus depreciation is $11,160 in the first year.
Example**
Purchase price of new truck or van |
$25,000 |
| First year depreciation |
(11,060) |
| Remaining purchase price depreciated according
to passenger vehicle table |
$13,940 |
Assuming an effective tax rate of 35%, the current year tax benefits would be $3,871.
Important Note: These rules do not apply to certain "modified" light trucks and vans that cannot be used for personal use. For example, a light duty van that has only a front bench for seating, permanent shelving that fills most of the cargo area, "constantly carries" merchandise or equipment, and has been painted with advertising or the company's logo will generally qualify as "modified" for this purpose. These vehicles will qualify for tax treatment as if they weighed in excess of 6,000 pounds.
Conclusion
Explaining the features and benefits of the tax law can help improve sales of vehicles weighing in excess of 6,000 pounds. Please contact me if you have questions or if you would like me to come to your dealership to review the tax benefits of these vehicles in more detail.
**All of the examples assume that the vehicle is used 100% for business purposes. If the business usage is less than 100%, the resulting tax benefit will be reduced and possibly eliminated. |
