IF YOU NEED a new set of wheels for your business, it could pay to get your shopping done by year’s end. A big tax break for heavy sports-utility vehicles might fade away in the new year.
As it stands now, many small businesses can claim a generous first-year depreciation writeoff for the business-use percentage of the cost of a new or used “heavy” SUV, pick-up or van. To qualify, the vehicle must be used over 50% for business, and it must have a gross vehicle weight rating of more than 6,000 pounds.
Business owners can take that writeoff under what’s known as the Section 179 deduction (named for part of the Internal Revenue Code) for new purchases of equipment, machinery and other items. For an SUV, the maximum Section 179 deduction is currently $25,000. For a non-SUV (see below), you can often deduct the entire business-use percentage of the vehicle’s cost, because your total Section 179 deduction for 2007 can be as much as $125,000. (For more year-end tax planning moves, click here .)
However, Congress could decide to ban Section 179 deductions for heavy SUVs because these gas-guzzlers have been demonized for contributing to global warming. It’s not certain whether the change will happen, but if it does, the new rules likely would apply to vehicles placed in service after 2007. This year would probably be left alone. Most likely, vehicles weighing over 14,000 pounds won’t be affected in any event, because they are not generally used as passenger vehicles.
Assuming nothing changes for tax years beginning in 2007, the following two year-end strategies will still be available. (Please consult your tax pro before pulling the trigger, because there are other limitations on Section 179 deductions not explained here.)
Purchase Heavy SUV by Year-End
Say by Dec. 31 of this year, you buy and put into service a Cadillac Escalade (a heavy SUV with a $60,000 sticker) that will be used 100% for business. You can generally claim the following depreciation writeoffs on your business’s 2007 federal income tax return or form: The $25,000 Section 179 deduction plus $7,000 worth of regular first-year depreciation [20% x ($60,000 – $25,000) = $7,000]. So your 2007 depreciation deductions would add up to $32,000, or about 53% of the Escalade’s cost. This is a far better tax deal than if you spent the same $60,000 on a BMW used 100% for business. In that case, your 2007 depreciation writeoff would be limited to a mere $3,060 under the so-called luxury auto rules.
Purchase Heavy Non-SUV for Really Big Tax Savings
The full Section 179 deduction — potentially as much as $125,000 for tax years beginning in 2007 — is available for new or used heavy business vehicles that are not considered to be SUVs for tax purposes. Such non-SUVs include:
1. Vehicles with a cargo area of at least six feet in interior length that’s not easily accessible directly from the passenger compartment. For example, many pick-ups with full-size beds will fit this description. Beware: Some “quad cab” and “extended cab” pick-ups may have cargo beds that are too short to qualify.
2. Vehicles designed to seat more than nine passengers behind the driver’s seat. For example, many shuttle vans will fit this description.
3. Vehicles with a fully enclosed driver’s compartment and cargo area, no seating behind the driver’s seat, and no body section protruding more than 30 inches ahead of the leading edge of the windshield. This sounds weird, but many delivery vans will meet this description.
The bottom line: Heavy vehicles that fall under these three exceptions remain eligible for the full Section 179 writeoff of up to $125,000 for tax years beginning in 2007. That means you can probably deduct the full business-use portion of your heavy non-SUV’s cost this year, as long as Congress doesn’t make any changes.
Bill Bischoff, a certified public accountant with more than 25 years of experience, has authored books and training courses for tax professionals, and frequently writes about consumer and small-business tax matters.
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