Tax Tip Tuesdays Strategy No. 2: Larger Vehicles Provide Larger Tax Savings

Tax Tip Tuesdays Strategy No. 2: Larger Vehicles Provide Larger Tax Savings
by Ken Smith

Why settle for a practical company car when your accountant can help you drive in style?

Passenger vehicles used for business provide less tax savings than SUVs and Larger Vehicles for three reasons (in addition to the price tag)

IRC Section 280F(a) contains luxury auto depreciation limitations that apply to cars, light trucks, and light
vans used for business. The Tax Increase Prevention Act of 2014, P.L. 113-295, extended bonus depreciation retroactively to the beginning of 2014, but did not extend it to 2015.

For these vehicles placed in service during 2015, the maximum annual depreciation deductions are:

 

Maximum Depreciation First Six Years
2015 Maximums
Auto vs. Large Truck

When vehicles are used less than 100% for business, the numbers shown above are reduced.

Larger vehicles provide larger tax savings. Greater tax savings are made possible because the luxury auto depreciation limitations apply only to “passenger automobiles” as defined by the Tax Code [IRC Sec. 280F(a)(1)(A)]. When a vehicle is not classified as a “passenger auto” and is used over 50% for business, it is treated as five-year MACRS property and falls under the “regular” depreciation rules.

Click here to compare models that might fit your driving pleasure.

The more favorable depreciation rules for large vehicles provide for faster depreciation and larger tax savings for owners equal to the following percentages of the business-use portion of the vehicle’s basis: Year 1 20.00%, Year 2 32.00%, Year 3 19.20%, Year 4 11.52%, Year 5 11.52%, Year 6 5.76%

Larger vehicles also qualify for the Section 179 deduction and for first-year bonus depreciation for new vehicles in years when bonus depreciation is allowed.

The tax-saving strategy is to buy a vehicle heavier than the passenger auto classification. Specifically, a passenger vehicle is not considered to be a passenger auto if it has a gross vehicle weight rating of more than 6,000 pounds.

Passenger vehicles that meet the 6,000 pound “heavy” definition are considered trucks for depreciation purposes. One caution is that the Section 179 Deduction for Heavy SUVs is subject to a $25,000 limit for heavy SUVs with gross vehicle weight ratings between 6,001 and 14,000 pounds.

There is no $25,000 limitation on vehicles that are not considered to be SUVs. Non-SUVs must meet a series of detailed and specific standards to qualify for the most favorable depreciation treatment. Schedule an appointment with the experts at Brown CPA Group, Ltd. for more details and assistance in choosing a large vehicle which will meet the Non-SUV large vehicle standard.

To summarize, passenger autos fall under the small luxury auto depreciation limits. Larger vehicles qualify for the Section 179 deduction and faster 5-year MACRS depreciation.

In conclusion, despite the often complex definitions and sometimes confusing limitations on heavy vehicles used for business, consulting an expert in these matters at Brown CPA Group, Ltd. can result in great tax planning opportunities that result in significant tax savings when structured appropriately.

To schedule an appointment to implement this strategy and others within the context of your unique tax situation, Contact Brown CPA Group, Ltd., at (847) 509-4100.

About the author: Ken Smith is an Enrolled Agent and Senior Staff Accountant with Brown CPA Group, Ltd. We know that success means different things to different people. While a business owner strives to maximize profits, increase efficiency and plan for succession; an individual client is more concerned with tax planning, wealth management, retirement and estate planning. At Brown CPA, we work with you on the total picture. Together, we succeed.