Deducting Auto Expenses & Luxury Auto Limits

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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 2012, the standard mileage rate is 55.5 cents per mile (the same as at the end of 2011). 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. However, 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 is $3,060 (or $11,060 if the bonus depreciation is elected) for 2011. The first-year limit is $200 more for vans and trucks purchased in 2011.

In an effort to rein in the practice of purchasing SUVs as a tax shelter, Congress has placed a 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.

The following is a representative example of a heavy SUV write-off (assuming 100% business use) for a year allowing 100% bonus depreciation (part of 2010 and all of 2011):

Heavy SUV Total Cost                                  $50,000
100% Bonus Depreciation                        
Total First Year Write-Off                                                                        $50,000

The following is a representative example of a heavy SUV write-off (assuming 100% business use) for a year allowing 100% bonus depreciation in which the taxpayer elects to step down to 50% bonus depreciation:

Heavy SUV Total Cost                                   $50,000
50% Bonus Depreciation                           
Balance                                                        $25,000
Regular 1st Year Depreciation (20%)         
Total First Year Write-Off                                                                        $30,000

The following is a representative example of a heavy SUV write-off (assuming 100% business use) for a yearallowing 50% bonus depreciation and used in combination with a Sec. 179 deduction:

 

If you are planning the buy an SUV based on this big write-off, be sure to call first to find out the status of the current legislation and how the tax benefits apply to your particular situation.