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Depreciation Rules Favor Big Cars

The most recent Tax Report summarized tax breaks both new and old for cars used in a business, especially new depreciation rules passed by Congress in 2010 that expire at the end of this year.

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The bottom line: There’s a big incentive for business owners to buy a behemoth gas guzzler like a Cadillac Escalade or Ford Expedition this year. They can deduct 100% of the purchase price right away (minus a disallowance for any personal use, of course).

Lawmakers were far less generous with depreciation deductions for purchases of cars weighing less than 6,000 lbs. For these lighter vehicles they also favored more expensive cars (like a Lexus) over less expensive ones (like a Hyundai ).

CPA Douglas Stives of Monmouth University teased this overall result out of highly complex guidance issued earlier this year by the Internal Revenue Service (See Rev. Proc. 2011-21 and 2011-26).

Here is a longer explanation of how Mr. Stives arrived at his conclusion about larger and smaller cars weighing less than 6,000 lbs.

*The IRS defines a “luxury car” as –believe it or not—one costing more than $15,300. Such cars are subject to depreciation limits unless they weigh more than 6,000 lbs. and the special 100% deduction applies.

*The maximum first-year depreciation for these “luxury cars” is $11,060. This consists of annual regular depreciation of $3,060 for the first year plus “bonus” depreciation of up to $8,000. The write-off in Year Two is normally $4,900, then $2,950 in Year Three, and $1,775 in Years Four and beyond.

*Changes to the law last year left first-year depreciation for “luxury cars”  unchanged, but they reduced the out-year deductions for those costing less than $30,625. For example, a $20,000 car would get a second-year deduction of only $3,200 instead of $4,900.  The higher deductions still apply to cars costing more than $30,625  (and weighing less than 6,000 lbs.).

The computations required to arrive at these results are mind-numbing, but Mr. Stives doesn’t blame the IRS. The fault in this case, he says, was Congress’s hasty legislation last year.

Readers, what do you think of these depreciation rules?

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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