Client Letters

Why it may benefit your business to purchase a large SUV

The car you own and use for business is subject to more restrictive depreciation rules than those that apply to other depreciable assets. For example, a car used for business is treated as five-year property under the depreciation rules, which normally would entitle you to a deduction of 20% of the depreciable basis of the car (its cost for tax purposes) in the year you place it in service. In addition, new automobiles predominantly used in a business and acquired after Sept. 10, 2001 and before Sept. 11, 2004 qualify for 30% additional first-year depreciation. However, under the so-called “luxury auto” rules, depreciation deductions are artificially capped. For example, if you bought a business auto and placed it in service in 2002, your combined depreciation and expensing deduction for it for 2002 couldn't exceed $3,060, regardless of the cost of the car ($7,660 if the car qualifies for, and you don't elect out of, the 30% additional first-year depreciation).

If you're thinking of getting a new business auto, you may be better off taxwise if you buy one of those popular sport utility vehicles (SUVs) instead of a car. That's because the annual depreciation and expensing caps don't apply to trucks or vans (and that includes SUVs) that are rated at more than 6,000 pounds gross (loaded) vehicle weight. So, for example, if you bought one of those heavy SUVs in 2002 for $35,000, and used it 100% for business, you could write off $28,840 of its cost on the 2002 return (that assumes you're eligible to use the full $24,000 “expensing” amount on the SUV, plus you get $4,840 of regular depreciation)—that's over 80% of the cost. If you buy the SUV in 2003, the expensing amount is $25,000. However, you need to carefully watch the amount of your business use. If business use of the vehicle doesn't exceed 50% of total use, then the heavy SUV has to be depreciated via straight line, doesn't qualify for the 30% additional first-year depreciation and isn't eligible for expensing.

For more details about this special opportunity to get large write-offs when you buy a heavy SUV for business, and how your depreciation deductions would be affected if you trade in your current vehicle instead of selling it, please give me a call.

Very truly yours,