Luxury Automobile Exclusion Regs.

Temporary and proposed regulations (TD 9069, 8/6/03) were recently issued to exclude certain vans and light trucks from the depreciation limits imposed on luxury automobiles. The rules apply to property placed in service after July 6, 2003.

Discussion

Sec. 280F(a) limits the depreciation allowable on luxury automobiles to standard inflation-adjusted amounts prescribed by the IRS. Currently, the allowable first-year depreciation deduction for luxury automobiles is $10,710 (including $7,650 in bonus depreciation allowed by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)). The deductions allowed in the second and third years are $4,900 and $2,950, respectively. Annual depreciation continues at $1,775 for each succeeding year until the cost of the automobile is fully recovered; see Rev. Proc. 2002-14. These limits apply even if the taxpayer elects to expense the vehicle under Sec. 179.

With few exceptions, all passenger automobiles (as defined in Sec. 280F(d)(5)(A)) are subject to the luxury automobile limits. This provision defines passenger automobile as any 4-wheeled vehiclewhich is manufactured primarily for use on public streets, roads, and highways, andis rated at 6,000 pounds unloaded gross vehicle weight or less (in the case of trucks or vans gross vehicle weight (GVW) replaces uploaded gross vehicle weight). As a result of this definition, a multitude of vehicles are subject to the luxury automobile limits. An exception applies to large trucks and SUVs with GVWs in excess of 6,000 pounds. Under the new temporary regulations, discussed below, certain vans and light trucks are also excluded from the definition of passenger automobile and, thus, are not subject to the aforementioned depreciation caps.

Temp. and Prop. Regs.

Under the luxury automobile limits, a vehicle with a valid business purpose cannot be fully depreciated over the standard five-year recovery period. For example, using the above limits, it would take 10 years to fully recover the cost of a $30,000 van or light truck. The temporary regulations will help to prevent that, by excluding from the definition of passenger automobile any van or truck that is a qualified nonpersonal use vehicle (as defined in Temp. Regs. Sec. 1.274-5T(k)(2)). This regulation defines a qualified nonpersonal use vehicle as any vehicle which, by reason of its nature (i.e., design), is not likely to be used more than a de minimis amount for personal purposes (e.g., police and fire vehicles, ambulances, qualified moving vans, and delivery and utility repair trucks, etc.). Essentially, a van or truck qualifies for the exclusion if it has been specially modified and is not likely to be used more than a de minimis amount for personal purposes; see Temp. Regs. Sec. 1.274-5T(k)(7).

Apparently, the IRS wants only valid business-use vehicles to qualify under the temporary regulations, using objective criteria. A taxpayers mileage logs or assertion that a van or truck is used substantially for business purposes is not enough. The Service wants to see vehicle modifications that make personal use of the vehicle unlikely. The extent of these modifications will likely determine the defensibility of the taxpayers position to exclude a vehicle from the luxury automobile limits.

Comments suggested that the IRS broaden the temporary regulations to include all vans and trucks or those used in a specified manner (i.e., 100% business use). However, the Service decided against this approach, concluding that such a broad exclusion might encourage taxpayers to purchase a more expensive van or truck even if a less expensive one would sufficiently meet business needs.

New Van and Truck Luxury Limits

In addition to the temporary regulations, the IRS is set to issue higher luxury depreciation limits exclusive to vans and trucks. The new limits will reflect the higher prices for these vehicles (at press time, the 2003 revenue procedure containing the inflation-adjusted limits had not been issued). This action, as well as the increased first-year depreciation allowed under the JGTRRA, will increase the likelihood that vans and trucks not qualifying for the luxury automobile exclusions, will be fully depreciated within the standard five-year cost recovery period.

Implications

Although qualifying vehicles may be narrowly defined under the temporary regulations, the tax benefits of such qualification can be substantial. As stated above, the maximum first-year depreciation deduction allowed for a van or light truck is $10,710 (exclusive of any 2003 increase). However, if the vehicle can be excluded from the luxury automobile limits, the allowable first-year depreciation can be much higher.

For example, under the JGTRRA, a taxpayer can claim first-year depreciation of $18,000 on a $30,000 vehicle. In addition, vehicles not subject to the luxury automobile limits can be expensed under Sec. 179. With the boost of the Sec. 179 expense election to $100,000 under the JGTRRA, many nonluxury vehicles can be fully expensed in year one, a substantial benefit when compared to the several years it would take to depreciate a $30,000 luxury automobile. All told, it is in taxpayers and tax advisers best interests to take advantage of these temporary regulations when applicable.

(For more discussion, see Lusby, News Notes, Expensing SUVs, this issue.)

From Steven R. Hritz, CPA, KFMR Katz Ferraro McMurtry PC, Pittsburgh, PA