When you use a vehicle for business purposes, you can deduct the business portion of the operating expenses on your business. If you use the car for both business and personal purposes, you may deduct only the cost of its business use. You can generally determine the expense for the business use of your car in one of two ways, the standard mileage rate method or the actual expense method.

Standard Mileage Rate Method: The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance and depreciation (or lease) expenses. The rate varies from year to year and for 2009, the standard mileage rate is 55.0 cents per mile. In addition, the cost of business-related parking and tolls is deductible.

Caution: If you don’t use the standard mileage rate in the first year the vehicle is placed in service, you cannot use it in future years. If, in a subsequent year, you switch to the actual method, you must use the straight-line method for depreciation. If the car is leased, you must continue to use the standard mileage rate in future years.

Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible. Both methods can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions.  Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.”

The depreciation deduction for luxury vehicles has an annual limit which generally changes slightly for each tax year and is estimated to be $2,960 for 2009. However, for 2008, the Economic Stimulus Act provides for bonus depreciation.  As a result, the maximum first year deduction of passenger vehicles, van and small trucks is increased by 8,000 for vehicles placed in service during 2008, providing a first year limit of $10,960 ($11,160 for small trucks and vans).

In an effort to reign in the practice of purchasing SUVs as a tax shelter, Congress has placed limit of $25,000 on the §179 deduction for certain vehicles. The limit applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver’s seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

In addition to the Section 179 deduction for 2008, taxpayers can also apply the 50% bonus depreciation, which is allowed for 2008 only. Combining the $25,000 Sec. 179 deduction with the new 50% bonus depreciation and the regular depreciation on the balance can provide a huge first-year write-off in 2008. The following is a representative example (assuming 100% business use):

If you are planning the buy an SUV based on this big write-off, be sure to call first to see the status of current legislation. 

With gas prices going through the roof maybe now is the time to take advantage of the energy tax incentives available for the purchase of hybrid vehicles.

If you purchase a hybrid vehicle in any year before 2011, you may qualify for a tax credit that is made up of two separate credits;

• The increased fuel economy credit, ranging from $400 to $2,400,
  and
  
• The lifetime fuel savings credit, ranging from $250 to $1,000.

Thus, you can receive tax credits up to $3,400 depending upon the vehicle’s efficiency, If the vehicle is purchased for personal use, the credit will reduce the regular tax to zero, but any excess credit is lost. However, to the extent that the individual is subject to the alternative minimum tax (AMT), the credit provides no benefit at all. On the other hand, if some portion of the vehicle is used for business, then the credit is allocated between the personal credit and a general business credit. Unlike the personal portion of the credit, the general business credit does offset the AMT, and any unused portion can be carried to other tax years.

There is also a limitation on the credit based on how many the manufacturer has produced. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.

As you can see, it is not as simple as you might think and depending on your particular circumstances you might not benefit from the credit at all. Thus, before you sign on the dotted line, you need to:

(1) Make sure you are not in the AMT and can benefit from the credit,

(2) Verify the amount of credit available for the vehicle you are purchasing, and

(3) Make sure the credit is not limited because the manufacturer has exceeded the 60,000 car limit.

Additionally, you should evaluate whether the extra cost usually commanded for hybrid vehicles can be recouped by a combination of the tax benefit and anticipated fuel cost savings over the period you expect to drive the vehicle.

Standard Mileage Tax Strategy – If you use a vehicle for business, you have the option of deducting the actual expenses including fuel, repairs, insurance, etc., or deducting a standard amount for each business mile driven. The standard mileage rate is determined periodically by the IRS using average costs of operating a vehicle. With the increase in fuel costs, the IRS has set the business mileage rate for 2009 to 55.0 cents per mile. By using the standard mileage rate with a high fuel-efficient vehicle, it is conceivable that you could deduct more than the actual cost of operating the vehicle.

The answer to that question depends upon whether or not the vehicle is being used for business purposes, where the expenses are being deducted, and the type of loan. If the loan is a consumer loan secured by the vehicle, then the following rules would apply:

• If the vehicle is being used partially for business and the expenses are being deducted on your self-employed business schedule then
  the business portion of the interest will be deductible as business interest, but the personal portion will not. 
  
  
• If the vehicle is being used partially for business as an employee and the expenses are being deducted as an itemized deduction, then neither the business portion nor the personal portion of the interest will be deductible. 
  
  
• If the vehicle is entirely for personal use, then none of the interest will be deductible, because the only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest. 

As an alternative to a nondeductible consumer loan, you might consider acquiring that vehicle with a home equity line of credit. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to the purchase of a vehicle or motor home. Using a home equity line will make the interest deductible. 

Before borrowing against the home, you should consider the following:

• Treat the home equity loan like a consumer loan and pay it off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for.
  
  
• When buying a car, you can sometimes get very favorable interest rates or a rebate.To determine which is best, compare the difference in total loan payments over the life of the loans to the rebate amount.
  
  
• It is also good practice to make sure the benefit of making the interest deductible is greater by using the home equity line of credit than the benefit of the low interest consumer loan or the rebate. 
  
  
• If there is any chance of defaulting on the loan, the repercussions from defaulting on a home loan are far more serious than on consumer debt.

If you need assistance in deciding on a course of action, please call our office.

Many of today’s sport utility vehicles that are more than 6,000 pounds in gross weight are not subject to the luxury auto rules. Owners using these vehicles for business historically have been able to utilize both the Sec 179 expense deduction and bonus depreciation, and have not had their depreciation deduction limited by annual caps since the Sec 179 expense limit is in excess of $100,000 and allows taxpayers to write off the entire business portion of an SUV’s cost in the first year.

The Sec 179 expense deduction is limited to $25,000 for sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. The $25,000 represents a substantially higher amount than allowed for other vehicles that are subject to the luxury auto limits.

There are some complicated exclusions to the SUV restriction. They include vehicles that are designed for more than nine individuals, equipped with an open cargo area, etc. Please contact this office for further details.