Two Temporary Deductions for Business Vehicles

For vehicles purchased by an individual on or after February 17, 2009 and before January 1, 2010, the Recovery Act of 2009 modifies the definition of deductible taxes to include qualified motor vehicle taxes paid or accrued within the tax year.  Thus, the sales tax paid on the purchase of a business vehicle will not be included in the capitalized cost of the vehicle and presumably can be deducted as a tax paid.

The Recovery Act generally allows this deduction to both itemizers and those claiming the standard deduction as an addition to that deduction.  The deduction is subject to two limitations:

• Purchase Price Limitation - Under a purchase price limitation, only taxes on that part of the qualified motor vehicle's purchase price not exceeding $49,500 may be deducted.

• Income Limitation - Under an income limitation, the amount of sales or excise taxes that may be treated as qualified motor vehicle taxes is phased out ratably for a taxpayer with modified AGI (MAGI) between $125,000 and $135,000 ($250,000 and $260,000 on a joint return).

The Recovery Act also extended the 50% bonus depreciation through 2009, thus increasing the first-year deduction for vehicles by $8,000.  This provides the unincorporated small business owner with two extra tax benefits for buying a new business vehicle between now and the end of the year: a sales tax deduction and boosted first-year depreciation.

Example:  Peter, an unincorporated business owner, buys a new $40,000 auto which he uses 100% for business driving.  He paid $3,400 (8.5%) in state sales tax on the car.  If he had purchased the car before February 17, 2009, his business basis in the vehicle would be $43,400 ($40,000 cost plus $3,400 of sales tax), and, assuming the luxury auto dollar limits are the same as 2008,  his first-year depreciation deduction would be $10,960 (the regular first-year depreciation allowance of $2,960 plus the $8,000 bonus depreciation amount).  If Peter buys the car on March 1, his basis in the vehicle is only the purchase cost ($40,000).  His first-year depreciation is still $10,960, but he gains a $3,400 deduction for the sales tax.  Counting both tax benefits, Peter ends up deducting $11,400 more than normal for a purchase in 2009.

The sales tax deduction will not apply to C-Corporations, and it is unclear at this time whether it will apply to purchases made by S-Corporations.  Presumably, the deduction must be taken at the individual level either as an itemized deduction or as an add-on to the standard deduction by taxpayers not itemizing.  Watch for further information in the future. 

Please call this office with any questions related to these deductions.

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