Depreciating Cars, Trucks, Vans, and SUVsMs. Greta P. Hicks
July 25, 2013 — 4,950 views
For vehicles purchased on or after July 7, 2003, there are five types of vehicle depreciation rules controlled by:
- Code Sec. 280F, luxury vehicle depreciation caps;
- Code Sec. 168(k), bonus depreciation;
- Code Sec. 168, MACRS depreciation;
- Code Sec. 274, the definition of luxury vehicles; and
- Regs. 1.274-5T(k), the definition of non-personal use vehicles.
Type 1 is for automobiles that weighs under 6,000 pounds, unloaded, gross vehicle weight. This includes most all cars that operate on fossil fuels. Code Sec. 280F caps Code Sec. 168, MACRS depreciation at $2,960 plus Code Sec. 168(k), bonus depreciation of $7,650 for a total of $10,610 on cars defined by Code Sec. 274 as luxury vehicles.
Type 2 is for trucks, vans and SUVs that weigh under 6,000 pounds gross vehicle weight. The Code Sec. 280F depreciation caps for these vehicles place in service during 2004 is $3,260 MACRS depreciation plus $7,650 bonus depreciation for a total of $10,910 for the year purchased and placed in service.
Type 3 is for “qualified non-personal-use vehicles,” commonly called special purpose vehicles. These include, for example, police, fire, ambulance, fire truck, hearse, or light pick-ups, trucks, vans, or SUVs with special equipment added to them that make their personal use minimal. This category includes only vehicles weighing under 6,000 pounds gross vehicle weight but the Code Sec. 280F and 168*k) dollar caps do not apply.
What light pickups, trucks, vans, or SUVs are “qualified non-personal-use vehicles” as vehicles that have been modified in such a way that they are not likely to be used more than a de minimis amount for personal purposes. An example of this type of vehicle is modified van that typically has a front bench for seating, permanent shelving that fills most of the cargo area, and advertising or a company name painted on its side. See T.D. 9133 for filing an amended return for year 2003 returns.
Type 4 vehicles are vehicles that weigh less than the Code Sec. 274 6,000-pound limit that are powered by electricity. Code Sec. 280F depreciation is limited to $8,880 for vehicles placed in service during 2004 plus bonus depreciation of $22,950 for a total of $31,830.
Type 5 is all vehicles in Types 1 through 4 that weigh more than the 6,000-pound limit. Code Sec. 280F depreciation ceiling limits do not apply and the vehicle may be depreciated under Code Sec. 168, allowing full MACRS depreciation; Code Sec. 179, election for first-year write off; and Code Sec. 168(k), additional first-year bonus depreciation for all business use of the vehicle.
Code Sec. 168(k) qualified property does not apply to used vehicles, but applies to new vehicles and other original-use vehicles. It can apply to a vehicle purchased by you and used for personal purposes when you later convert it to business use. Original-use is the adjusted basis of the vehicle traded in, plus the cash out or note to purchase the new vehicle. The capital expenditures to recondition or refurbish a used vehicle also qualifies as original-use property (168(k)(2)(ii)). Year 2004 bonus depreciation for vehicles more than the 6,000 pounds is either 30 percent or 50 percent of the cost of the car, truck, van, pickup, or SUV in the year it is purchased and placed in service.
If converting a business vehicle to personal-use or selling a vehicle, see T.D. 9132 and Code Sec. 280F(b)(2)(A) for recapture rules. Temporary regulations under Code Sec. 168, released July 23, 2003, provide guidance on how to depreciate MACRS property acquired in a like-kind exchange under Section 1031, or as a result of an involuntary conversion under Section 1033 when both the acquired and relinquished property are subject to MACRS in the hands of the acquiring taxpayer. If you lease a car, there are equivalent limitations on the lease of a luxury car, a car costing $17,409 or more. If donating a car to charity, see IRS Publication 4302, “A Charity’s Guide to Car Donations,” and IRS Publication 4304, “A Donor’s Guide to Car Donations.”
Reg. 1.168(i)-6T(a) and T.D. 9115 present additional challenges. For example, EZ trades in a piece of equipment with an adjusted tax basis (cost less depreciation taken) of $20,000 and adds $10,000 cash or note to purchase the new piece of equipment. The total tax value of that new equipment is $30,000 of which 50 percent can be written off for bonus depreciation and the balance of $15,000 is available for regular depreciation.
If that trade was an old vehicle for a new vehicle, the depreciation limits from Code Sec. 280F and 168(k) must be observed. It takes several calculations to determine the MACRS and bonus depreciation that applies for the year of the trade.
First, using the example above and assuming that the trade takes place in 2004, calculate depreciation on the $20,000 for the time that the old car was used during year 2004 and apply the $2960 limits.
Second, calculate the depreciation on the $20,000 for the time that the new car was owned; subtract the amount used in the first step and compare it to the $2,960 limit. Do the same for bonus depreciation and apply the limit.
To add more complexity to the vehicle depreciation rules, assume that the vehicle is used less than 100 percent, but more than 50 percent for business.
Let’s hope that we have computer programs that can do all this calculating and comparing. It may be wise during the coming tax season to double-check your tax preparation program to see if it is adhering to all the new depreciation regulations, rulings and procedures released during 2003 and 2004. Also check 2003 returns filed to see if amended returns are in order.
Ms. Greta P. Hicks
Greta P Hicks CPA
Greta P Hicks is a former IRS Examination manager and Ms Hicks currently serves on the Editorial Board of the Texas Society of CPAs and is Tax Editor of Today’s CPA. Greta is active on the TSCPA IRS Relations Committee and teaches seminars on IRS.