Tax Planning Ideas to Consider When Buying a Car for your Business

November 2011

SUV Advantages

It's a good time to shop for a new vehicle. Thanks to the 100% bonus first year depreciation deduction under the 2010 Tax Relief Act, if the vehicle is going to be used for business, there are significant tax advantages to consider. In general, for cars purchased after September 8, 2010 and before January 1, 2012, taxpayers get a depreciation deduction in the initial year equal to 100% of the cost of the new vehicle. 

The bonus 100% first-year depreciation break, and a generous “section 179” expensing allowance, will result in significant tax deductions for taxpayers who have taxable income, buy heavy SUV’s in 2011 and use them for business. Taxpayers that purchase heavy SUVs receive a “section 179” deduction up to $25,000 in the initial year. The rules that limit the amount of annual depreciation that can be deducted on passenger automobiles do not apply to heavy (over 6,000 pounds) SUVs because they are considered to be trucks.

For example, if you bought a new SUV over the 6,000 pound limit for $50,000 and use it 100% for business, you would be able to expense the full $50,000 immediately under the 100% bonus depreciation rules. If you bought a used SUV for $50,000 and use it 100% for business, you would be able to expense $25,000 of the cost immediately under “section 179”. The remaining basis of $25,000 (50,000 – 25,000) would be eligible for the $5,000 of regular first-year depreciation. So your total first year tax write-off would be $30,000. The remaining $20,000 ($50,000 original cost less $30,000 deductible currently) would be recovered in future years under the normal depreciation rules.

Passenger Auto Advantages

The bonus 100% first-year depreciation break, and a generous expensing allowance, will also result in significant tax deductions for taxpayers who buy passenger autos in 2011 and use them for business.

With the Small Business Jobs Act of 2010, the first-year limit on depreciation for passenger automobiles is increased by $8,000. The 2010 Tax Relief Act extended this generous expensing allowance through December 31, 2012. There are two sets of dollar limits for passenger autos placed in service this year. The categories are passenger autos that are not vans or trucks and passenger autos that are light trucks or vans. The first-year limit on depreciation for passenger autos that are not trucks or vans is $3,060 plus the $8,000 increase for a total of $11,060. This passenger auto is defined as less than 6,000 pounds in gross vehicle weight. For example, if you purchased a new passenger auto for $30,000 during 2011 and used it 100% for business, you would be able to expense $11,060 in the first year.  The first-year limit on depreciation for light trucks or vans is $3,260 plus the $8,000 increase for a total of $11,260. Light trucks or vans are defined as passenger autos built on a truck chassis and are less than 6,000 pounds in gross vehicle weight. For example, if you purchased a light truck or van for $35,000 during 2011 and used it 100% for business, you would be able to expense $11,260 in the initial year.

New versus Used

Please note, generally, the “section 179” expense can be utilized on new or used qualified vehicles. In general, the 100% bonus depreciation can only be utilized on new qualified vehicles.

We hope this information is helpful. Please call Jordan Empey, CPA, Supervising Tax Senior, at 719-630-1186 for more details about how this information may benefit you.