Luxury Car Rules May Limit Vehicle Write-Offs

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 any 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." 

To see how this works, let's hypothetically say you and an associate each bought a car in 2008. Your car costs $50,000 while your associate's costs $25,000. You both use your vehicles 75% for business. Cars are in the 5-year life depreciation category and generally the first-year depreciation for 5-year life items is 20%.  However, your depreciation deduction for the year (including any choice to expense part of the car's cost) will be subject to the first-year "luxury vehicle" limitation, which for 2008 is $2,960 or $10,960 if a special bonus allowance is claimed (the base amount for 2009 has not been announced at the time this article was prepared but will be approximately the same).

                            

As you can see, both you and your associate’s depreciation for the first year is the same amount because of the luxury auto limits.  Thus, your associate will be able to deduct the same amount as you, even though his car had a much lower cost than yours.

To stimulate the economy Congress has temporarily allowed businesses to recover the costs of capital expenditures made in 2008 and 2009 faster than the ordinary depreciation schedule would allow, by permitting these businesses to immediately write off 50% of the cost of new, depreciable property (e.g., equipment, tractors, wind turbines, solar panels, and computers) acquired in 2008 and 2009 for use in the United States.  This bonus depreciation provision also applies to new cars but is limited to a maximum of $8,000.  So, in our example above, the annual depreciation before applying the business use factor will be equal to $10,960 ($2,960 $8,000). 

Thus, your first-year depreciation (you used the vehicle 75% for business) will be $8,220 (10,960 x .75).

This may seem unfair, but there is an alternative that can help. Certain sports utility vehicles (a Suburban for example) exceed 6,000 pounds unloaded gross weight and have special rules.

For more information on how to maximize your business vehicle deductions, please give us a call.

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