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Stingy car-depreciation limits add incentive to buy SUV

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in Small Business Tax,Small Business Tax Deduction Strategies

If you're shopping around for a new business vehicle, take into account the just-released IRS depreciation limits for cars placed in service in 2005. Despite the ever-increasing costs of operating a vehicle, including spiking gas prices, depreciation allowances are the same or lower this year than in 2004. (IRS Revenue Procedure 2005-13)

Strategy: Swerve around those cheapo car limits by buying a heavy-duty SUV for your business. The depreciation limits don't apply to vehicles built on truck chassis that weigh more than 6,000 pounds loaded.

Congress last year capped the first-year deduction for such heavy-duty SUVs at $25,000 for vehicles placed in service after Oct. 22, 2004. But $25,000 is still a lot better than you'd do under the IRS's new luxury car limits. "Luxury" means any car costing more than $14,800. (See box at right for the annual depreciation limits for cars placed in service in 2005.)

Remember that the figures in that box are based on 100 percent business use. For example, if you start driving a new business car in 2005 and use it 75 percent for business, your first-year deduction is limited to $2,220 (75 percent of $2,960).

If you lease a luxury car instead of buying it, you can deduct the portion of the lease payment attributable to business use. But the IRS effectively imposes luxury car caps on the lease payments by requiring lessees to include a specified amount in taxable income each year. The amounts are listed in IRS tables at www.irs.gov/publications/p463/ar02.html.

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