Write Off $20,000 on a Business Vehicle in the First Year

By Susan Jacksack, J.D., Staff Writer, CCH Business Owner's Toolkit

Did you know that heavy sport-utility vehicles (SUVs) — those that are rated at more than 6,000 pounds gross (loaded) vehicle weight — escape the federal luxury excise tax on new cars? For most types of passenger cars, in 2000 the luxury tax on a new car would be 5% of the price that exceeds $38,000. For example, on a $40,000 car, you'd pay a luxury tax of $100 ($40,000 - $38,000 = $2,000, and 5% of 2,000 is $100).

However, certain types of vehicles are exempt from the tax. Among them are some of today's most popular models, including Chevrolet Suburbans, Toyota Land Cruisers and larger Range Rovers.

The advantages of SUVs don't end there. Because of some rather complicated provisions in the tax laws (otherwise known as "loopholes"), these vehicles can be eligible for much more favorable tax write-offs when they are used for business purposes. Instead of the $3,060 depreciation deduction limit that applies to most cars, SUVs can be eligible for a deduction of more than $20,000 in the first year.

For example, let's say that during 2000, a self-employed doctor buys a $50,000 Range Rover rated as having an over-6,000-pound gross (loaded) vehicle weight. The doctor consistently uses the vehicle 80% for his medical practice purposes and 20% for personal driving. Result: the doctor can deduct $24,000 of the vehicle's cost for tax year 2000 ($20,000 expensing plus $4,000 depreciation). If he keeps the vehicle for its full recovery period, his deductions would look like this:

Note that if the SUV in our example were used 100% for business, the maximum first-year recovery deduction would be $26,000 ($20,000 expensing plus $6,000 depreciation [$50,000 less $20,000 X 20%]). If the SUV were used less than 80% for business, the depreciation deductions would be correspondingly less.

What if the doctor had bought a $50,000 passenger auto, instead of an SUV? His annual depreciation deductions would have been limited by the luxury auto depreciation limits. For autos placed in service in 1999, the dollar caps (assuming 100% business use) are $3,060 for the first year, $5,000 for the second year, $2,950 for the third year, and $1,775 for each succeeding year until the cost is recovered. Furthermore, there is no "additional" expensing deduction of $20,000.

The ability to write off a big chunk of a heavy SUV's cost in the first couple of years can make purchasing such a vehicle more attractive than leasing it — that is, if the vehicle is used extensively for trade or business purposes. But be careful: in order to be eligible for these special tax breaks, you'll have to be able to show that at least 50% of the use of the SUV was for business. In addition, if your business use drops below 50% for some later years, you may have to "pay back" some of the $20,000 tax break you've already taken. Consult your tax advisor for further details, and to see whether purchasing an SUV would make sense for you.

To keep up-to-date regarding all the tax law changes affecting your taxes and your business, be sure to pick up a copy of CCH Business Owner's Toolkit Tax Guide 2001. This easy-to-use tax reference--and accompanying FREE offer for online tax return preparation and filing--is available at major booksellers nationwide, by calling 1-800-248-3248, or by visiting our online bookstore.