Today’s tax quotes:
“True, of course, it is that in a system of taxation so intricate and cast as ours there are many other loopholes unsuspected by the framers of the statute, many other devices whereby burdens can be lowered.” Benjamin N. Cardozo
“Contrary to what some people claim, the tax laws have a lot of respect for logic. They use it so sparingly.” -- Jeffery L. Yablon.
Lovers of large, costly vehicles (assuming that any such citizens remain, with fuel prices becoming ever more painful) have been handed an apparently inadvertent gift by Congress in the Tax Relief Act that in late 2010 also extended lower tax rates and made other taxpayer-friendly changes. This interesting development was recently explored by Amy S. Elliott in the publication “Tax Notes Today.”
The issue involves how much of a tax write-off is available for heavyweight vehicles such as sport utility vehicles (SUV’s) used for business. Under section 179 of the Code, a business is allowed an immediate 100% write-off for capital asset purchases up to a dollar limit (currently, $500,000), subject to a number of rules and limitations. However, in 2004 Congress became irritated at reports that business owners were buying large, expensive SUV’s or other heavy luxury vehicles for business and writing off the entire cost under section 179. As a result, Congress added section 179(b)(6) [now section (b)(5)], under which write-offs for SUV’s not subject to limitation under section 280F (which limits depreciation for passenger vehicles used for business, but defines “passenger vehicle” as one weighing 6,000 pounds or less) were limited to $25,000.
There matters stood until the end of 2010, when Congress decided as part of the Tax Relief Act to encourage business investment by increasing the additional first year depreciation deduction (AKA “bonus depreciation”) from 50% of the cost of property to 100% for property placed in service after September 8, 2010, and before January 1, 2012. Although as noted, section 280F would act as a limit on such depreciation for most automobiles, it does not cover large, heavy vehicles such as SUV’s, which invariably exceed 6,000 pounds.
As a result, buyers of vehicles such as the Cadillac Escalade, Porsche Cayenne, or Land Rover, some of which cost north of $100,000, may now write off the entire purchase cost as bonus depreciation, without running afoul of the $25,000 limitation that still would prevent a full write-off under section 179, or of the section 280F limitation that would prevent this result with your average Porsche Carrera or Lamborghini.
This loophole has not escaped the notice of car dealers. For example, a Land Rover dealership in Guilford, Connecticut produced a slick brochure trumpeting how the new law makes buying a Land Rover a “savvy business move.” For the brochure, see http://landroverguilford.com/2010TaxDepreciationBrochure_1.pdf.
As the dealership notes, in addition to its stimulating qualities as a vehicle, the Land Rover “can also be stimulating to your bottom line.” A purchase of an $80,000 Land Rover for business use during 2011 can be written off in its entirety, while the purchase of an $80,000 luxury car weighing less than 6,000 pounds would produce a depreciation write-off of only 14% ($11,200) in 2011.
Another interesting aspect to this loophole is that if the vehicle is later sold, the accelerated depreciation claimed in the first year must by recaptured as ordinary income. However, even this unfortunate result can be avoided by simply trading in the vehicle, rather than selling it. The like-kind exchange rules of section 1031 would apparently shield the transaction from recapture.
This entire situation seems to validate Jeffrey Yablon’s comment, quoted above. But who cares about logic when one can embark on a business trip in one’s new luxury SUV, heedless of the fuel costs and secure in the knowledge that Uncle Sam has managed to subsidize the purchase to the tune of a 100% immediate tax deduction!