The complexities of "luxury vehicle" depreciation

Read NCTimes.com Article Here >>

By: JIM VANDER SPEK - For the North County Times August 30, 2003

Congratulations. You don't need to buy a giant truck after all. Since July 7 of this year you have been able to purchase a light truck or van and still depreciate it in a quick manner within your business.

To understand the significance of this, you need to know the history of what Congress calls "luxury vehicles." Back in the heady days of the first Reagan tax reforms, businesses for one brief year were allowed to depreciate all cars in a nifty three years. This caught the attention of some ultra luxury auto dealers who used this as a way to sell their high-priced wheels to well-heeled business buyers. The deductions were enormous.

The reaction was swift. Congress decided to stomp out the problem by curtailing the deductions on autos. A new rule came into play, which limited depreciation to the amount of auto depreciation, which a "non-luxury vehicle" would generate over five years.

As a result, the IRS redefines the definition of "luxury auto" every year based on an inflation adjustment. The threshold is about $15,300, although we are not sure yet for this year. A new wrinkle was added after 9-11. Congress said that autos for the first time could exceed the luxury limits by taking "bonus depreciation" of $4,600 on top of the mandated maximum of $3,060 in the first year. Suddenly, buying a regular car got smart again since the total first year deduction jumped to $7,660.

To further muddy the water, Congress recently increased the deduction by an additional $3,050 for autos placed in service after May 5, 2003. Simply put, you can get a big deduction this year if you buy a new vehicle and use it in your business, even if it is a "luxury vehicle." In the second and later years, however, things calm way down. You can only deduct as if it were about a $15,300 vehicle ---- no matter what you paid for it.

All of this brings us to the unfortunate business owner who buys a light truck or delivery van, especially if it is specially modified. Why should a vehicle like this be branded as a luxury vehicle with limited deductions, unless it weighs more than 6,000 lbs?

The IRS listened and developed a brand new category called "qualified non-personal use" vehicles. These are light vans and trucks with little personal use. If you buy a vehicle like this from now on, you can ignore the luxury auto rules and depreciate them as rapidly as other equipment, including massive first year depreciation allowances.

Of course, the big sigh of relief for car retailers is that SUVs and other big iron which weigh over 6,000 lbs. still get a bright green light. The big boys don't care about the new definition. Since they weigh so much, they slipped through the cracks and were never considered luxury autos to start with. Perhaps using such vehicles for everyday use was never contemplated when the law was originally written.

Jim Vander Spek is an accountant in Escondido and a frequent contributor to the North County Times. Contact him at JimV@VanderSpekCPAs.com.