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Steer toward big tax break for vehicles

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in Small Business Tax,Small Business Tax Deduction Strategies

One tax loophole still on the books is large enough to drive a Jeep or Ford Explorer through it … literally.

Strategy: Buy a heavy-duty sport utility vehicle (SUV) for your business. As long as you meet certain requirements, you can bypass the usual tax law limit. In fact, you may be able to take a first-year deduction for the majority of the vehicle’s cost.

Under a 2004 tax law, the maximum Section 179 deduction for a heavy-duty SUV is capped at $25,000. That’s still more than double the limit for most cars.

Here’s the whole story: Normally, you can claim a maximum $500,000 Section 179 depreciation deduction for business property placed in service in 2013. However, the tax law sets stingy annual depreciation deduction limits for garden-variety passenger vehicles. These so-called “luxury auto limits” actually kick in at relatively low levels.

At least the limits for 2013 are boosted by 50% bonus depreciation (see box below). But you can do even better.

Key exception: A heavy-duty SUV with a gross vehicle weight rating (GWR) more than 6,000 pounds is exempt from the luxury auto depreciation limits.

Example: Suppose you buy a new heavy-duty SUV in 2013 for $60,000 and use it 100% for business. In that case, you can immediately deduct $25,000 of the cost under Section 179. Also, you can claim 50% bonus depreciation on the remaining $35,000 of the cost, or $17,500. Finally, you can generally write off 20% of the $17,500 remaining depreciable balance under the regular depreciation rules, or $3,500. The total first-year depreciation write-offs add up to $46,000, which represents a whopping 77% of the vehicle’s cost! The remaining $14,000 can be written off via annual depreciation deductions over the next five years.

Tip: The 50% bonus depreciation break is only available for new (not used) vehicles, but the Section 179 deduction applies to both new and used vehicles.

 

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