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 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 2009. 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 rate for 5-year life items is 20%.  However, the 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 2009 is $2,960 or $10,960 if a special 2009 50% bonus allowance is claimed. 
                             

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.

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 and can provide a much higher first year write off.  For more information on how to maximize your business vehicle deductions, please give us a call.

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