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Steer past roadblocks to vehicle deductions

by on
in Small Business Tax Deduction Strategies

There’s one tax loophole on the books that’s large enough to drive a truck through … literally. Now it’s even “bigger and better” than before.

Strategy: Buy a heavy-duty sport utility vehicle for your business. Due to a provision in the new 2010 Tax Relief Act, you can write off most or all of the cost of an SUV placed in service this year—without the usual restrictions.

But you should move fast if you’re in the market for a new business vehicle. Congress may act soon to undo the unexpected windfall created by the new tax law.

Here’s the whole story: Under Section 179 of the tax code, you can deduct up to $500,000 of the cost of qualified business property placed into service in tax years beginning in 2010 and 2011. But the Section 179 deduction is limited by strict rules for “luxury cars.”  The luxury car limits generally apply to passenger vehicles with an unloaded gross vehicle rating (GVR) of 6,000 pounds or less.

For example, the maximum first-year deduction for a used vehicle placed in service in 2010 by a calendar-year business is $3,060 ($3,160 for used light trucks and vans). The figures are adjusted based on the percentage of business use. Therefore, if you used the car 80% for business in 2010, the maximum deduction is $2,448 (80% of $3,060). The limits are adjusted annually, but the changes have been minimal in recent years. The 2011 figures are the same as 2010 (see box below).

However, the luxury car limits get a boost from “bonus depreciation.” With the 50% bonus depreciation break allowed under prior law, the regular first-year luxury car limit was increased by $8,000 for new (not used) vehicles placed in service in 2010. So the maximum first-year deduction you could take in 2010, based on 100% business use, was $11,060 ($11,160 for new light trucks and vans).

Key exception: A heavy-duty SUV with a GVR of more than 6,000 pounds is generally exempt from the luxury car limits. In the past, SUV owners could use the Section 179 rule to write off the full cost of these vehicles attributable to business use. This strategy was nipped in the bud by a 2004 tax law change that capped the maximum Section 179 deduction at $25,000—still a pretty good deal.

Congress has threatened to close this loophole on numerous occasions. Nevertheless, for the time being, it remains intact.

Surprise tax bonanza: The new 2010 Tax Relief Act authorizes 100% bonus depreciation for qualified business property placed in service after Sept. 8, 2010, and before Jan. 1, 2012. (It also reinstates 50% bonus depreciation for 2012.) This tax provision covers property with a cost recovery period of 20 years or less. Automobiles and trucks are treated as five-year property under the regular depreciation deduction rules, so a heavy-duty SUV qualifies.

In other words, if you buy a new (not used) SUV in 2011 and place it in service right away, you can write off most of the cost, as long as you use it more than 50% for business. For an SUV costing $50,000, your first-year deduction is $40,000 if you use it 80% for business (80% of $50,000). And, if you use the vehicle 100% for business, the entire $50,000 cost is deductible!

Tip: The same rules apply to 2010 deductions for a heavy-duty SUV placed in service after Sept. 8.

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