2010 Tax Relief Act Creates a 100% Write Off for Heavy SUVs Used Entirely for Business
Practice Alert
Although generous tax breaks for gas-consuming heavy SUVs have in the past raised the ire of Congress, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) actually made tax breaks for these assets even more generous. Although it may be an unintended result, the limited-time 100% bonus depreciation allowance for qualified property under Code Sec. 168(k) allows taxpayers that buy a new heavy SUV and use it entirely for business to write off the entire purchase price in the placed-in-service year.
Background. For tax years beginning in 2010 and 2011, taxpayers generally may elect under Code Sec. 179 to expense up to $500,000 of the cost of eligible personal property used in the active conduct of a trade or business. However, depreciation dollar caps apply to the combined allowable deduction under Code Sec. 179 and MACRS depreciation for “passenger autos.” (Code Sec. 280F(a)(1); Code Sec. 280F(d)(1)) The dollar caps apply to passenger autos, i.e., four-wheeled vehicles manufactured primarily for use on public streets, roads, and highways, and rated at an unloaded gross vehicle weight (GVW) of 6,000 pounds or less. (Certain types of vehicles, such as ambulances, are excepted.) For a truck or van, the 6,000-pound test is applied to the truck's or van's gross (loaded) vehicle weight. (Code Sec. 280F(d)(5)(A); Reg. § 1.280F-6(c)) The first-year dollar caps for vehicles bought and placed in service in 2010 were $3,060 for passenger autos and $3,160 for trucks or vans (the 2011 limits haven't been released yet).
For passenger autos that are eligible for bonus first-year depreciation under Code Sec. 168(k), (i.e., generally, new vehicles acquired and placed in service after Dec. 31, 2007 and before Jan. 1, 2013), the regular first-year dollar cap on depreciation and Code Sec. 179 expensing is increased by $8,000. (Code Sec. 168(k)(2)(F)) Thus, for example, unless the taxpayer elects out of bonus depreciation, the enhanced first-year dollar caps for eligible passenger autos placed in service in 2010—including those trucks and vans that are treated as passenger autos for purposes of the dollar-cap rules (see above)—are $11,060 for autos and $11,160 for the trucks and vans.
Heavy SUVs—those with a GVW rating of more than 6,000 pounds—are exempt from the luxury auto dollar caps because they fall outside of the definition of a passenger auto in Code Sec. 280F(d)(5). To deal with this “SUV tax loophole,” the American Jobs Creation Act of 2004 (P.L. 108-357) imposed a limit on the expensing of heavy SUVs. Under Code Sec. 179(b)(6), not more than $25,000 of the cost of a heavy SUV placed in service after Oct. 22, 2004 may be expensed under Code Sec. 179. These rules apply, with some exceptions, to SUVs rated at 14,000 pounds GVW or less.
Also, because heavy SUVs are exempt from the luxury auto dollar caps, the balance of the heavy SUV's cost may be depreciated under the regular rules that apply to 5-year MACRS property. Before the 2010 Tax Relief Act, if the heavy SUV was new and acquired after 2007 and before 2011 by the taxpayer for use in its trade or business (and it was otherwise eligible for bonus depreciation), the taxpayer also could, in the placed-in-service year, write off 50% of the cost of the heavy SUV that wasn't expensed and claim a regular 20% first-year depreciation allowance for the balance of the cost.
RIA illustration : A calendar year taxpayer bought a $50,000 heavy SUV in June of 2010 and used it 100% for business in 2010. It may write off $40,000 of the cost of the vehicle on its 2010 return, as follows:
- $25,000 expensing deduction, plus
- $12,500 of bonus first year depreciation ($50,000 − $25,000 of expensing × .50 = $12,500), plus
- $2,500 of regular first-year depreciation ($50,000 − $25,000 of expensing − $12,500 bonus depreciation × .20 = $2,500.
Now 100% first-year writeoffs for heavy SUVs. Under the 2010 Tax Relief Act, the bonus first-year depreciation percentage is 100% (instead of 50%) for bonus-depreciation-eligible “qualified property” that is generally (1) placed in service after Sept. 8, 2010 and before Jan. 1, 2012, and (2) acquired by the taxpayer after Sept. 8, 2010 and before Jan. 1, 2012. Qualified property includes property to which MACRS applies with a recovery period of 20 years or less. Autos and trucks are 5-year MACRS property and thus qualify for bonus depreciation (assuming business use exceeds 50% of total use). (Code Sec. 168(k)(2)(D))
Thus, a taxpayer that buys and places in service a new heavy SUV after Sept. 8, 2010 and before Jan. 1, 2012, and uses it 100% for business, may write off its entire cost in the placed-in-service year. There is no specific rule barring this result for heavy SUVs. Thus, if the taxpayer in our illustration above had bought the heavy SUV in, say, October of 2010, it could write off the full $50,000 cost of the vehicle on its 2010 return.
RIA Research References: For the limits on heavy SUVs, see FTC 2d/FIN ¶ L-9907.2; United States Tax Reporter ¶ 1794.015; TaxDesk ¶ 268,411.1.
Source: Federal Tax Updates on Checkpoint Newsstand tab 1/26/2011