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Depreciating Automobiles and SUV's

 

Headliner Volume #117

March 18, 2005

 

The American Jobs Creation Act (AJCA) of 2004 clarified the rules regarding allowable depreciation deductions for automobiles, sport utility vehicles (SUVs), trucks, and vans, especially with regards to the “Luxury Auto Limitations” under Internal Revenue Code 280F and the Section 179 expense election.  This is important because determining whether a vehicle falls under the luxury limits is the first step in computing depreciation for a vehicle.

Vehicles That Qualify for the Maximum Auto Limitations

Certain vehicles are limited in the total amount of depreciation that can be claimed in one year.  Vehicles that qualify for the implementation of the depreciation limitations under section 280F fall under two categories: 

·           Passenger automobiles that are four-wheeled vehicles with an unloaded gross vehicle weight of 6,000 pounds or less and manufactured primarily for use on public streets, roads, and highways.

·           Trucks, Vans and SUV’s that are passenger automobiles built on a truck chassis (includes minivans and sport utility vehicles (SUV’s), manufactured primarily for use on public streets, roads, and highways and that have an unloaded gross vehicle weight of less than 6,000 pounds that do not meet the description of a non-personal use vehicle (see “exempt vehicles”).  

There are three possible components of a vehicle’s total depreciation deduction.  They are;

o       The Section 179 Expense deduction (for the first year only)

o       Bonus depreciation (also only for the first year), and

o       Annual depreciation.

Each component of the total depreciation deduction has its own restrictions and limitations, and there is a limitation on the amount of total depreciation allowed for vehicles subject to the IRC 280F limitation.   Publication 463, Travel, Entertainment, Gift & Auto Expenses and Publication 946, How to Depreciate Property, explain these limits and contain additional information on the Section 179 expense, bonus depreciation and annual depreciation.

Vehicles That Are Exempt From The Maximum Auto Limitations

Vehicles that are exempt from the Section 280F limitations are trucks, vans, and SUV’s that are:

·        Built on a truck chassis and

·        have an unloaded gross vehicle weight of more than 6,000 pounds or

·        trucks, vans and SUV’s that are under 6,000 that have been modified to meet the description of a “qualified non personal use vehicle” .   See Chapter 5 of Publication 946 or Rev Proc 2004-20 for more information.

 

Placed In Service Dates

The allowable deduction allowed for exempt vehicles is based on the date on which the vehicle was placed in service.

 

Placed in Service Before October 23, 2004

If an exempt vehicle was placed in service before October 23, 2004 it is subject only to the specific limitations applicable to the Section 179 expense election, bonus depreciation and annual depreciation.  It is not subject to any maximum depreciation limitations. 

 

Placed in Service After October 22, 2004

If an exempt vehicle was placed in service after October 22, 2004, the AJCA of 2004 Section 910 limits the Section 179 expense portion of the depreciation amount to $25,000 for certain SUV’s that are:

·        not subject to Section 280F and

·        are rated at 14,000 lbs of gross vehicle weight or less.

There is no maximum depreciation limitation.  Standard limitations still apply for bonus and annual depreciation. 

Exempt Vehicles Not Subject to the $25,000 Section 179 Limitation

Exempt vehicles that meet any of the following criteria are not subject to the $25,000 Section 179 limitation if they are:

·           Designed to have a seating capacity of more than 9 persons behind the drivers seat,

·           Equipped with a cargo area of at least 6 feet in interior length which is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible from the passenger compartment, or

·           Designed with an integral enclosure, fully enclosing the drivers compartment and load carrying device and does not have seating rearward of the drivers seat and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

In addition to Publication 463 and Publication 946, Revenue Procedure 2004-20 also contains useful information about allowable depreciation deductions for vehicles.

 

For more information, please visit the IRS website at www.irs.gov.