Acquiring a New Business Vehicle? Maximize Your Deductions!

If, in 2008, you purchased and placed in service an automobile used in your business, you have two choices for deducting expenses related to the vehicle: (1) use a standard mileage rate (50.5 cents for each business mile driven in the first half of 2008 and 58.5 cents for each business mile driven in the last half of 2008), or (2) deduct actual expenses, including depreciation.  The standard mileage deduction is relatively easy to compute. Simply multiply the number of miles the vehicle was driven for business for each half of the year by the appropriate mileage rate for that period.

Determining actual expenses requires more work but may provide a larger deduction.  All expenses for the vehicle, for example, insurance, gas, repairs, garage rent, etc., must be recorded for the year.  In addition, a depreciation deduction is allowable under the actual expense method (the standard mileage rate has an amount for depreciation built into it).  The situation in 2008 is unique because the first-year depreciation limit for vehicles weighing 6,000 pounds or less is more than three times as much as in the previous year by virtue of the 50% bonus depreciation — which applies in 2008 only.  Thus, a passenger car used 100% for business has a first-year depreciation limit of $10,960; for light trucks and vans, the limit is $11,160.  Both of these limits include $8,000 of the new 50% bonus depreciation allowance.   If a vehicle is used less than 100% for business, these expenses are prorated based on the business use compared with the total miles for the year.  When the cost of fuel and the higher depreciation amounts for 2008 are considered, using the actual method for a vehicle placed in service during 2008 might be the right call.

Even though Congress is promoting energy efficiency, it still has not reined in the very large first-year deduction for heavy SUVs weighing more than 6,000 pounds.  By combining the $25,000 Sec. 179 expense deduction available for these SUVs, the new 50% bonus depreciation, and the regular depreciation on the remaining balance of the purchase cost, an SUV bought in 2008 can provide a huge first-year write-off.   The following is a representative example (assuming 100% business use):

Finally, if you acquire a qualified hybrid vehicle, you can take advantage of the Alternative Motor Vehicle Credit, and the business-use portion of the credit becomes a general business credit.  If all of the general business credit is not used in the current year, the unused portion is carried back one year and then forward for up to twenty years.

As you can see, there are several options and substantial write-offs to consider when purchasing a new vehicle.  Future years’ business use of the vehicle also needs to be looked at because the method chosen in the first year affects the way auto deductions are claimed in later years.  If you need assistance in developing a plan that is best suited to your unique tax situation, please call for an appointment.

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