Sport Utility Vehicle Rules Change
Volume 12, Number 49,
Issue 596
Section 179 Deduction for SUVs Reduced. The maximum annual depreciation deduction for business passenger automobiles is capped at certain dollar amounts. However, trucks, vans and SUVs are exempt from these "passenger auto" depreciation limitations if the "gross vehicle weight" exceeds 6,000 lbs. (e.g., a full-size pick-up; a full-size van; or a sport utility vehicle, including: Expedition, Range Rover, Tahoe, Durango, Suburban, BMW X-5, etc.). Consequently, prior to the Jobs Act, if more than 50% of the use of one of these vehicles was for business purposes, you could have taken the §179 deduction (up to $102,000 in 2004) with respect to the business portion of the vehicle. For example, if the vehicle had 100% business use, you could have immediately deducted up to $102,000 of its cost in 2004 (if it otherwise qualified under §179). Under the Jobs Act, SUVs, vans and certain other vehicles that have a gross vehicle weight of 14,000 lbs. or less are limited to a §179 deduction of up to $25,000 (reduced from $102,000). This new rule is effective for vehicles placed in service after October 22, 2004.
Example. Assume that on December 1, 2004, your business purchases an SUV (weighing 6,005 lbs.) for $70,000, which you use 100% for business. Assume further that this SUV qualifies for the maximum §179 deduction, the 50% additional first-year depreciation, and the normal accelerated depreciation deductions (using the mid-quarter convention). The total deductions in 2004 on this SUV would be $48,625, computed as follows: (i) a §179 deduction of $25,000, plus (ii) additional 50% first-year depreciation of $22,500 on the remaining basis ([$70,000 - $25,000] x 50%), plus (iii) $1,125 of MACRS depreciation ([$45,000 - $22,500] x 5% [using mid-quarter convention and 200% declining balance]). The remaining $21,375 of cost would be recovered in 2005 and later years under the general depreciation rules.
If the SUV is instead placed in service on January 2, 2005 (when the 50% depreciation is no longer available), the total depreciation deductions for 2005 would be only $34,000 (using the mid-year convention). Therefore, if you want maximum up-front depreciation deductions, you must place the SUV in service before 2005.
Any truck, van, or SUV weighing over 6,000 lbs is still fully exempt from the passenger auto depreciation limitations. It is only the §179 deduction amount that has been changed. Subject to limited exceptions, the 50% additional first-year depreciation deduction sunsets for all depreciable property (not just SUVs) if placed in service after December 31, 2004.
The Jobs Act provides that some vehicles weighing over 6.000 lbs. (even though not over 14,000 lbs.) are still entitled to the maximum §179 deduction ($102,000 for 2004). For example, a pick-up truck with a cargo area of at least 6 feet of interior length and a van with a seating capacity of more than 9 persons behind the driver are not limited to a $25,000 §179 deduction.
David B. Robinson, CPA
This issue is dedicated to my friend Greg Nienow with thanks for his inspiration to me to remember to pick the ball back up if it is dropped.
Index of Previous Issues of Tax Fax
