Under Section 179 of the tax code, you can deduct up to $500,000 of the cost of qualified business property placed into service in tax years beginning in 2010 and 2011. The Section 179 deduction, however, is limited by strict rules for “luxury cars.” The luxury car limits generally apply to passenger vehicles, with an unloaded gross vehicle weight of 6,000 pounds or less. For example, the maximum first-year deduction for a used vehicle placed in service in 2010 by a calendar-year business is $3,060 ($3,160 for used light trucks and vans). The figures are adjusted based on the percentage of business use. Therefore, if you used the car 80% for business in 2010, the maximum deduction is $2,448 (80% of $3,060).
However, the luxury car limits get a boost from “bonus depreciation.” With the 50% bonus depreciation break allowed under the prior law, the regular first-year luxury car limit was increased by $8,000 for vehicles placed in service in 2010. Therefore, the maximum first-year deduction you could take in 2010, based on 100% business use, was $11,060 ($11,160 for new light trucks and vans).
Key Exception: A heavy-duty SUV with a gross vehicle weight rate of more than 6,000 pounds is generally exempt from the luxury car limits. In the past, SUV owners were able to write off the full cost of these vehicles attributable to business use. This strategy was nipped in the bud by a 2004 tax law change that capped the maximum first-year deduction at $25,000—still a pretty good deal. Congress has threatened to close this loophole on numerous occasions. Nevertheless, for the time being, it remains intact.
Now the new 2010 Tax Relief Act authorizes 100% bonus depreciation for qualified business property placed in service after Sept. 8, 2010 and before Jan. 1, 2012. It also reinstates 50% bonus depreciation for 2012. This tax provision covers property with a cost recovery period of 20 years or less. Automobiles and trucks are treated as five-year property under the regular depreciation deduction rules, so a heavy-duty SUV qualifies. In other words, if you buy the SUV in 2011, and place it in service right away, you can write off the entire business portion of the cost, as long as you use it more than 50% for business. For an SUV costing $50,000, your first-year deduction is $40,000, if you use it 80% for business (80% of $50,000). And, if you use the vehicle 100% for business, the entire $50,000 cost is deductible!
This unique tax break most likely will not last forever. We can help you discover the possibilities for your situation. Call your Tax Consultant to see how you would fare.
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