Luxury automobile depreciation rules offer obstacles and opportunities.Prior to the Deficit Reduction Act of 1984 (DRA DRA Delta Regional Authority DRA Developmental Reading Assessment (educational test) DRA Division of Ratepayer Advocates (California) DRA Data Research Associates DRA Directory and Resource Administrator ), the business and investment use portion of an automobile could be depreciated Depreciated may refer to:
expensive automobile and status symbol. [Trademarks: Crowley Trade, 368] See : Luxury purchased on Jan. 1, 1984 for $60,000 and used 75% for business yielded a $15,000 annual depreciation deduction ($60,000 x 0.75)/3) for three years. Congress thought the large depreciation deductions allowed prior to the DRA helped subsidize sub·si·dize tr.v. sub·si·dized, sub·si·diz·ing, sub·si·diz·es 1. To assist or support with a subsidy. 2. To secure the assistance of by granting a subsidy. the purchase of more expensive automobiles than were needed for use in business(1); thus, it enacted limits on annual depreciation of "passenger automobiles" (PAs). DRA Section 179(a) enacted Sec. 280F(a)(2)(A) to limit the allowable depreciation (and Sec. 179 election) to $4,000 in the first tax year and $6,000 in each subsequent tax year for property placed in service after June 18, 1984. In 1985, P.L. 99-44, Section 4(a)(2)(A) and (B), further limited PA depreciation to $3,200 in the first tax year and $4,800 in each subsequent tax year. The Tax Reform Act of 1986 (TRA TRA Training TRA Transfer TRA Transition TRA Tennessee Regulatory Authority TRA Telecommunications Regulatory Authority (Oman) TRA Tax Reform Act (1976, 1984, or 1986) TRA Teachers Retirement Association '86), Section 201(d)(4)(A)(i), reduced the limits to $2,560 in the first tax year, $4,100 in the second tax year, $2,450 in the third tax year, and $1,475 in subsequent tax years (as codified cod·i·fy tr.v. cod·i·fied, cod·i·fy·ing, cod·i·fies 1. To reduce to a code: codify laws. 2. To arrange or systematize. in Sec. 280F(a)(1)(A)). According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Sec. 280F(d)(7), the luxury limits are adjusted for inflation for PAs placed in service after 1988. Although Sec. 280F is entitled en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: "Limitations on depreciation for luxury automobiles," the luxury limits apply as well to moderately priced vehicles. While "luxury automobile" is not defined by the Code or regulations, its meaning is implied by Sec. 280F(a)(1)(A) -- any PA costing at least $15,800 (for 1997), derived by dividing the first-year limit for 1997 ($3,160) by the first-year 200% declining balance (DB) modified accelerated cost recovery system Modified Accelerated Cost Recovery System (MACRS) A 1986 act that set out rules for the depreciation of qualifying assets, allowing for greater acceleration over longer periods of time. (MACRS See Modified Accelerated Cost Recovery System. MACRS See Modified Accelerated Cost Recovery System (MACRS). ) percentage for five-year property (20%).(2) DRA Section 179(a) also created Sec. 280F(d)(4), "listed property," which includes PAs, other property used as a means of transportation and other categories discussed below. Sec. 280F(b)(3) and Temp. Regs. Sec. 1.280F-6T(d)(2)(i) provide that listed property must be used more than 50% in a trade or business of the taxpayer (qualified business use (QBU QBU Qualified Business Unit QBU Query Based Update )) to be considered used predominately for business. The use of listed property for income production does not qualify as business use in meeting the more-than-50% test; however, if the test is met, both production of income and QBU percentages are used to compute To perform mathematical operations or general computer processing. For an explanation of "The 3 C's," or how the computer processes data, see computer. depreciation.(3) The luxury limits for various tax years are summarized in Table 1 at right. [TABULAR tab·u·lar adj. 1. Having a plane surface; flat. 2. Organized as a table or list. 3. Calculated by means of a table. tabular resembling a table. DATA NOT REPRODUCIBLE IN ASCII ASCII or American Standard Code for Information Interchange, a set of codes used to represent letters, numbers, a few symbols, and control characters. Originally designed for teletype operations, it has found wide application in computers. ] Defining PA Sec. 280F(d)(5)(A) defines a PA as any four-wheeled vehicle: * Manufactured primarily for use on public streets, roads and highways List of articles related to roads and highways around the world. International/World
* Rated at 6,000 pounds unloaded gross vehicle weight (UGVW) or less (in the case of a truck or van, 6,000 pounds GVW GVW abbr. gross vehicular weight or less). For gas guzzler tax Gas Guzzler Tax An additional tax on the sale of vehicles that have poor fuel economy. Notes: A vehicle is subject to a tax if it gets less than a certain number of miles per gallon. purposes, GVW is defined by Regs. Sec. 48.4064-1(b)(3) as the value specified by the manufacturer as the maximum loaded weight for which a single vehicle was designed. For purposes of the excise tax Excise Tax 1. An indirect tax charged on the sale of a particular good. 2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS. Notes: 1. on heavy trucks and trailers sold at retail, Prop. Regs. Sec. 145.4051-1(e)(3) defines GVW as the maximum total weight of a vehicle. Sec. 280F(d)(5)(B) provides that the following types of vehicles are not PAs: * An ambulance, hearse or combination ambulance-hearse used by the taxpayer directly in a trade or business. * Any vehicle used by the taxpayer directly in the trade or business of transporting persons or property for compensation or hire. * Under Temp. Regs. Sec. 1.280F-6T(c)(3), any commuter highway vehicle (as defined in Sec. 46(c)(6)(B)). Thus, vehicles meeting the definition of a PA under Sec. 280F(d)(5)(A) are subject to the luxury limits; vehicles not meeting the definition of a PA are not subject to those limits. The PA category is very broad; very few four-wheeled vehicles with a UGVW of over 6,000 pounds are manufactured. Example 1: D acquires a PA for $20,000(4) in May 1996 that he uses 80% for business and 20% for personal use. Table 2 below lists the 200% DB MACRS depreciation for a six-year period, assuming that the 80% QBU continues for the PA's life and that no Sec. 179 election is made. [TABULAR DATA NOT REPRODUCIBLE IN ASCII] Depreciation in Year 6 (2001) is limited to $922, 80% of the lesser of the allowable depreciation ($1,152) or the luxury limit ($1,775). The normal recovery period of a PA (five-year property) is six years, due to the use of the half-year convention half-year convention The assumption for tax purposes that a newly acquired asset is placed in service halfway through the year regardless of when the asset is actually acquired and placed in service. . Because the luxury limits cap depreciation deductions over the six-year life, basis may remain unrecovered for years after the normal recovery period. At the end of the regular six-year depreciation period, Sec. 280F(a)(1)(B) allows recovery of the unrecovered basis of the business use portion at an annual rate that (in this example) cannot exceed $1,420 ($1,775 x 0.80), until fully recovered. Under Temp. Regs. Sec. 1.280F-2T(c)(1)(ii), unrecovered basis at year-end (col. 6) is unadjusted basis Unadjusted Basis A basis used for depreciation purposes. Unadjusted basis uses the original cost of property or equipment without regard to salvage value. Notes: This method of calculating depreciation is used for ACRS and MACRS. (without reduction for any Sec. 179 election) over allowable depreciation (including any Sec. 179 election) as if the vehicle were used 100% in a QBU. For vehicles that are not PAs, a Sec. 179 election is available for the business use cost, up to $17,500 (in 1996)5)), in addition to MACRS depreciation, without regard to the luxury limits. Example 2: The facts are the same as in Example 1, except that D's vehicle is a truck with a GVW of 6,200 pounds. This vehicle is not a PA and so is not subject to the luxury limits. Because there is 80% QBU, $16,000 ($20,000 x 0.80) is available for cost recovery and/or a Sec. 179 election in 1996. Example 3: The facts are the same as in Example 2, except that the vehicle cost $32,000. The business use portion, $25,600 ($32,000 x 0.80), is available for cost recovery and/or Sec. 179. For 1996, a Sec. 179 election can be made for the first $17,500; of the $8,100 ($25,600 -- $17,500) remaining depreciable depreciable Of, relating to, or being a long-term tangible asset that is subject to depreciation. basis, $1,620 ($8,120 x 0.20) can be deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. in 1996. Planning tip: Tax practitioners should advise clients considering the purchase of a vehicle for use in a trade or business to be aware of the luxury limits, and, if possible, to purchase a vehicle that is not a PA. Listed Property Sec. 280D(d)(4)(A) defines listed property as: * Any PA. * Any other property used as a means of transportation. * Any property of a type generally used for entertainment, recreation or amusement. * Any computer or peripheral equipment (as defined in Sec. 168(i)(2)(B)). * Any cellular telephone (or other similar telecommunications equipment). * Any other property of a type specified by regulations. Assets classified as listed property are limited by Sec. 280F as to deductions; Sec. 274(d)(4) requires that certain records be kept to substantiate To establish the existence or truth of a particular fact through the use of competent evidence; to verify. For example, an Eyewitness might be called by a party to a lawsuit to substantiate that party's testimony. said deductions. Deduction Limits Sec. 280F(b)(1) and (2) provide that QBU use of listed property must exceed 50% to avoid certain deduction limits and recapture recapture n. in income tax, the requirement that the taxpayer pay the amount of tax savings from past years due to accelerated depreciation or deferred capital gains upon sale of property. (See: income tax) RECAPTURE, war. . Listed property not used more than 50% in a QBU in the year placed in service does not qualify for a Sec. 179 election or MACRS depreciation, and can only be depreciated under the SL method. Moreover, if business use increases to over 50% in any subsequent year, use of the SL method must continue. If the property is used in a QBU more than 50% in the year placed in service, but less than that in any subsequent tax year, MACRS depreciation (including any Sec. 179 deduction) must be recaptured to the extent it exceeds the amount that would have been allowed under the SL method. The recapture is subject to self-employment tax Self-Employment Tax A tax imposed on self-employed people, who must pay this tax in order to receive social-security benefits upon retirement. Notes: The self-employment tax may be reduced if the person also pays social security and Medicare taxes through another employer. (if the taxpayer is a self-employed individual) and is added to the property's basis and deducted in subsequent years using SL depreciation.(6) Planning tip: Purchasers of listed property shortly before year-end should ensure that they have more than 50% QBU before year-end to reap maximum depreciation/Sec. 179 benefits. Failure to satisfy the greater-than-50% QBU requirements in the first year precludes use of accelerated depreciation Accelerated Depreciation Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years of the life of an asset. Notes: The straight-line depreciation method spreads the cost evenly over the life of an asset. and Sec. 179. Even if the QBU requirement is met, the placing of the property in service near the end of the year may require use of the mid-quarter convention (discussed below). Substantiation Requirements Temp. Regs. Sec. 1.280F-6T(e)(1) and (2) require a taxpayer to maintain certain records for listed property. For a PA, this includes an allocation of use based on mileage (e.g., between QBU and personal use). Special rules (discussed below) are provided for farm vehicles. Temp. Regs. Sec. 1.274-5T(b)(6) requires that the taxpayer maintain a record of expenditures as to the cost of acquisition, capital improvements, lease payments, maintenance and repairs and any other expenditures. Under Temp. Regs. Sec. 1.280F-6T(e)(3), the taxpayer must also document dates of use, the amount of use for business purposes and for investment purposes and the total use of the property for the tax period. Farmers Temp. Regs. Sec. 1.274-6T(b)(1) and (2) provide that farmers can claim a 75% QBU for one vehicle without allocating use if the vehicle is used during most of the normal business day directly in connection with the business of farming. Allocation records could be maintained to support a higher QBU According to Temp. Regs. Sec. 1.274-6T(d), the 75% safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. must be elected on the first return filed by the taxpayer after the vehicle is placed in service; failure to claim it on that return prevents use of the 75% rule for such vehicle. The Instructions to Schedule F, Form 4562, Depreciation and Amortization (Including Information on Listed Property), and IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. Pub. 225 (1996), Farmer's Tax Guide, do not mention the 75% rule. Further, the 75% rule only applies to allocation between farm and personal use. Records must still be maintained to support the vehicle's actual expenses and depreciable basis. QNUVs Listed property includes, under Sec. 280F(d)(4)(A)(ii), "any other property used as a means of transportation." This is defined by Temp. Regs. Sec. 1.280F-6T(b)(2)(i) to include trucks, buses, trains, boats, airplanes, motorcycles and any other vehicles for transporting persons or goods. However, Temp. Regs. Sec. 1.280F-6T(b)(2)(ii) states that listed property does not include any vehicle classified as a "qualified nonpersonal use vehicle" (QNUV) (as defined in Sec. 274(i) and Temp. Regs. Sec. 1.274-5T(k)). QNUVs are neither PAs nor listed property; thus, they are not subject to the luxury limits or the listed property recordkeeping requirements. Sec. 274(i) defines a QNUV as any vehicle that, by reason of its nature, is not likely to be used more than a de minimis An abbreviated form of the Latin Maxim de minimis non curat lex, "the law cares not for small things." A legal doctrine by which a court refuses to consider trifling matters. amount for personal purposes. Under Temp. Regs. Sec. 1.274-5T(k), QNUVs include: * Clearly marked police and fire vehicles (as defined in Temp. Regs. Sec. 1.274-5T(k)(3)). * Ambulances used as such or hearses used as such. * Any vehicle designed to carry cargo with a loaded GVW over 14,000 pounds. * Bucket trucks bucket truck n. A truck equipped with a cherry picker. ("cherry pickers cherry picker n. 1. A maneuverable vertical boom with an open bucket or cage at the end from which a worker can perform aerial work such as pruning trees or repairing electrical lines. 2. A vehicle equipped with such a boom. "). * Cement mixers. * Combines. * Cranes and derricks. * Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat. * Dump trucks (including garbage trucks). * Flatbed trucks A flatbed truck is a type of truck which can be either articulated or rigid. It has an entirely flat, level body with absolutely no sides or roof. This allows for quick and easy loading of goods, and consequently they are used to transport heavy loads that are not delicate or . * Forklifts. * Passenger buses used as such with a capacity of at least 20 passengers. * Qualified moving vans (as defined in Temp. Regs. Sec. 1.274-5T(k)(4)). * Qualified specialized utility repair trucks (as defined in Temp. Regs. Sec. 1.274-5T(k)(5)). * Refrigerated re·frig·er·ate tr.v. re·frig·er·at·ed, re·frig·er·at·ing, re·frig·er·ates 1. To cool or chill (a substance). 2. To preserve (food) by chilling. trucks. * School buses (as defined in Sec. 4221 (d)(7)(C)). * Tractors and other special purpose farm vehicles. * Unmarked vehicles used by law enforcement officers (as defined in Temp. Regs. Sec. 1.274-5T(k)(6)) if the use is officially authorized au·thor·ize tr.v. au·thor·ized, au·thor·iz·ing, au·thor·iz·es 1. To grant authority or power to. 2. To give permission for; sanction: . * Other vehicles the IRS may designate des·ig·nate tr.v. des·ig·nat·ed, des·ig·nat·ing, des·ig·nates 1. To indicate or specify; point out. 2. To give a name or title to; characterize. 3. . QBU Sec. 280F(d)(6)(B) and Temp. Regs. Sec. 1.280F-6T(d)(2)(i) define QBU as any use in a trade or business of the taxpayer, rather than use in an investment or other activity conducted for the production of income. As discussed above, listed property (including PAs) must be used more than 50% in a QBU to be considered predominately used for business. Use of listed property solely for income production is not a QBU, but if property is used more than 50% in a QBU, both production of income and QBU percentages are combined in computing computing - computer depreciation.(7) Sec. 280F(d)(6)(C) and (D) and Temp. Regs. Sec. 1.280F-6T(d)(2)(ii) provide that QBU does not include the following: 1. Leasing property to any 5% owner (as defined in Sec. 416(i)(1)(B)(i)) or related person (as defined in Sec. 267(b)).(8) 2. Use of property provided as compensation for the performance of services by a 5% owner or related person. 3. Use of property provided as compensation for the performance of services by any person not described in item 2 above, unless an amount is properly reported by the taxpayer as income to such person and, when required, income taxes are withheld.(9) A corporation that leases listed property to a 5% owner or related person cannot treat such use as a QBU; if the portion used for this purpose is greater than 50%, accelerated depreciation and Sec. 179 will not be available. However, such use may qualify as investment use, at least allowing SL depreciation. A 5% owner or related person may be allowed to use a business's listed property for personal purposes. Such use is not a QBU, according to Temp. Regs. Sec. 1.280F-6T(d)(3)(iv)(C), if the use of such property is provided as compensation. Example 4: L, a 10% shareholder of X Corporation, uses a PA furnished fur·nish tr.v. fur·nished, fur·nish·ing, fur·nish·es 1. To equip with what is needed, especially to provide furniture for. 2. by X as compensation for services 65% for personal use and 35% for business use. None of L's use is a QBU, because she is at least a 5% owner; thus, X cannot use accelerated depreciation or Sec. 179, because the QBU does not exceed 50%. However, according to Temp. Regs. Sec. 1.280F-6T(d)(3)(iv), 100% of L's use is business use for Sec. 162 purposes; thus, X can depreciate depreciate v. in accounting, to reduce the value of an asset each year theoretically on the basis that the assets (such as equipment, vehicles or structures) will eventually become obsolete, worn out and of little value. (See: depreciation) 100% of the PA under the SL method, if X reports L's personal use to her as income and withholds if required. The result would be the same if L used the PA 65% for business use and 35% for personal use. Example 5: N, a 2% shareholder of Y Corporation unrelated to any 5% (or more) Y shareholder, uses a PA furnished by Y as compensation for services 65% for personal use and 35% for business use. According to Temp. Regs. Sec. 1.280F-6T(d)(2)(ii)(A)(3), if the personal use portion is included in N's income and withheld on, the QBU is 100%, allowing Y to use accelerated depreciation and/or Sec. 179. Improvements Temp. Regs. Sec. 1.280F-2T(f) states that any improvement made to a PA that qualifies as a Sec. 263 capital expenditure is treated as a new item of depreciable property placed in service in the year made. However, taxpayers must aggregate the value of the property and the improvement when computing depreciation/Sec. 179 expense for a PA, then apply the applicable limits. Example 6: P buys a PA in May 1996 for $20,000; she uses it 75% for business, 10% for the production of income and 15% for personal purposes. On May 1, 1997, the engine is overhauled for $6,000. P is subject to the following luxury limits for both assets: Year Asset Depreciation allowed 1996 PA $2,601 ($3,060 x 0.85) 1997 PA and engine $4,165 ($4,900 x 0.85) 1998 PA and engine $2,508 ($2,950 x 0.85) 1999 PA and engine $1,509 ($1,775 x 0.85) 2000 PA and engine $1,509 ($1,775 x 0.85) 2001 PA and engine $1,273 ($26,000 x 0.0576 x 0.85) 2002 and later years PA and engine $1,509 ($1,775 x 0.85) Thus, the luxury limits effectively result in P not being able to depreciate the engine overhaul until the post-recovery period (2002 on). Dispositions Sales If a PA used for business and personal use is sold, the taxpayer must treat it as two different assets in calculating gain or loss -- a business asset and a personal asset. Example 7: B sold her PA on June 20, 1996 for $18,000; she had originally purchased it on May 1, 1993 for $28,000, and used it 80% for business and 20% for personal purposes. B never made a Sec. 179 election. The following depreciation was taken for the four years the vehicle was in service: Business Depreciation Year Limit use allowed 1993 $2,860 0.80 $2,288 1994 4,600 0.80 3,680 1995 2,750 0.80 2,200 1996 1,675 0.80 1,340 $9,508 The gain/loss on sale is computed as follows: Business Personal portion portion Sales price ($18,000) $14,400 $ 3,600 Less: Basis allocated to business use beginning basis ($28,000 x 0.80) = $22,400 less: depreciation (9,508) Adjusted basis (12,892) Basis allocated to personal use $28,000 x 0.20 (5,600) Gain (loss) $ 1,508 $(2,000) The $1,508 business gain is ordinary income under Sec. 1245. The amount of gain treated as ordinary income is the lower of (1) the depreciation allowed (or allowable) on the property or (2) the gain realized on disposition. The personal use loss is not deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). . Trade-ins Special rules apply to determine the basis of a PA used partly for business, acquired after June 18, 1984, that is traded for a new PA that will be used partly for business. A "trade-in adjustment" must be made to account for any personal use of the old PA; in effect, the adjustment reduces the basis of the old vehicle (but not below zero) for purposes of computing depreciation on the new one.(10) (This adjustment is not used to determine the gain or loss on disposition of the new vehicle.) The unadjusted basis of the new vehicle for depreciation is determined as follows: 1. Add to the adjusted basis of the old vehicle any additional amount (i.e., boot) paid for the new one. 2. Subtract A relational DBMS operation that generates a third file from all the records in one file that are not in a second file. the excess (if any) of (a) the total depreciation that would have been allowable during the tax years before the trade if the vehicle had been used 100% for business purposes over (b) the total depreciation/Sec. 179 election actually allowed during those years.(11) The effect of the calculation is to remove the personal use basis ineligible in·el·i·gi·ble adj. 1. Disqualified by law, rule, or provision: ineligible to run for office; ineligible for health benefits. 2. for depreciation on the traded vehicle from the adjusted basis of the new one. Example 8: The facts are the same as in Example 7, except that B traded her PA in for a new PA and paid $10,000 in cash. There is no gain or loss on the Sec. 1031 exchange; the basis of the new PA is computed as follows: Adjusted basis of new vehicle: Cost $28,000 Less: Depreciation for 1993-1996 9,508 Adjusted basis of old vehicle 18,492 Cash paid for new vehicle 10,000 Basis of new vehicle before trade-in adjustment 28,492 Trade-in adjustment 2,377(*) Adjusted basis of new vehicle $26,115 (*) Computation of trade-in adjustment: Depreciation if 100% business use: 1993 $ 2,860 1994 4,600 1995 2,750 1996 1,675 11,885 Less: actual depreciation 9,508 Trade-in adjustment $ 2,377 Mid-Quarter Convention This article has assumed use of the half-year convention in calculating MACRS depreciation. However, the Sec. 168(d)(3)(A) mid-quarter convention applies to all personal property placed in service during the tax year if more than 40% of the adjusted basis of depreciable assets (not including real property) placed in service during that year is placed in service in the last three months of that year. If the mid-quarter convention applies, an asset's depreciation percentages are calculated by further multiplying by a fraction tied to the quarter it was placed in service (87.5% for the first quarter, 62.5% for the second quarter, 37.5% for the third quarter, 12.5% for the fourth quarter). Planning tip: A business vehicle subject to the mid-quarter convention is limited in the amount of accelerated depreciation allowable in the acquisition and disposition years; however, the Sec. 179 election is not affected by the quarter the asset is placed in service (but is still subject to the luxury limits if the vehicle is a PA). Change from Personal to Business Use A taxpayer who changes use of a PA from 100% personal use to business use during the tax year, but has no records for the period prior to the change, should use the following rules to compute the percentage of business use for the year.(12) 1. Determine the percentage of business use for the period following the change by dividing business miles by total miles driven during the period following the change. 2. Multiply the resulting percentage by a fraction, the numerator numerator the upper part of a fraction. numerator relationship see additive genetic relationship. numerator Epidemiology The upper part of a fraction of which is the number of months the car is used for business and the denominator denominator the bottom line of a fraction; the base population on which population rates such as birth and death rates are calculated. denominator of which is 12. The depreciable basis of the newly converted business property is the lesser of fair market value or adjusted basis at the time of the conversion to business use.(13) Once converted, a vehicle can be depreciated under an accelerated or the SL method, depending on the QBU percentage. Example 9: M used a car for personal purposes during the first six months of 1996. During the last six months of 1996, she drove it a total of 20,000 miles, of which 15,000 were for business, resulting in a 75% QBU (15,000/20,000) for the last six months of 1996. Thus, M's QBU for 1996 is 37.5% (75% x 6/12). Standard Mileage Rate The luxury limits can be avoided by electing the standard mileage rate (SMR (Specialized Mobile Radio) The communications services used by police, ambulances, taxicabs, trucks and other delivery vehicles. Throughout the U.S., approximately 3,000 independent operators are licensed by the FCC to offer this service, which provides always-on ) of 31 cents per mile for 1996 (31.5 cents per mile for 1997(14)). The SMR is in lieu of Instead of; in place of; in substitution of. It does not mean in addition to. all expenses of operating an automobile (i.e., depreciation, maintenance, repairs, tires, gas (and taxes thereon there·on adv. 1. On or upon this, that, or it. 2. Archaic Following that immediately; thereupon. Adv. 1. thereon - on that; "text and commentary thereon" on it, on that ), oil, insurance and registration); however, the business portion of parking fees, tolls, interest on a vehicle purchase (for self-employed persons Noun 1. self-employed person - a writer or artist who sells services to different employers without a long-term contract with any of them free lance, free-lance, freelance, freelancer, independent ) and state and local personal property taxes are deductible. The SMR method must be elected in the first year the car is placed in service; if the election is made, neither ACRS ACRS See: Accelerated cost recovery system ACRS See Accelerated Cost Recovery System (ACRS). nor MACRS depreciation, nor a Sec. 179 election is available. In subsequent years, either the SMR or actual cost method can be used. A taxpayer using SL depreciation who has not taken a Sec. 179 deduction can switch to the SMR in a subsequent year. If the taxpayer used the SMR the first year the vehicle was placed in service and then changes to the actual cost method, to calculate SL depreciation thereafter, adjusted basis must be reduced (but not below zero) by a set rate per mile for all miles for which the SMR was used.(15) The SMR cannot be used if the taxpayer: * Does not own the car. * Uses the car for hire (e.g., a taxi). * Operates two or more cars at the same time (e.g., fleet operations). * Claimed a deduction for the car in an earlier year using ACRS or MACRS depreciation or taking a Sec. 179 deduction.(16) Conclusion Allowable vehicle depreciation depends on the percent of business use, whether the vehicle is a PA and the date placed in service. The rules discussed herein win prove helpful to tax practitioners in advising clients on structuring vehicle purchases. (1) See Staff of the Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, 98th Cong., 2d Sess. 559 (1984) hereinafter here·in·af·ter adv. In a following part of this document, statement, or book. hereinafter Adverb Formal or law from this point on in this document, matter, or case Adv. 1. , "Blue Book"). (2) See Rev. Proc. 87-57, 1987-2 CB 687, Table 1, five-year recovery property; because the Sec. 280F(a)(1)(A) first-year limit is subject to an inflation adjustment, the definition of "luxury automobile" changes as the annual limit increases. (3) Blue Book, note 1, p. 563. (4) According to IRS Pub. 917 (1995), Business Use of a Car, p. 6, an automobile's basis for depreciation is original cost (including taxes and tide), reduced by any Sec. 179 deduction, Sec. 179A clean-fuel deduction, and/or any qualified vehicle credit. (5) Small Business Job Protection Act of 1996, Section 1111, increases the Sec. 179(b)(1) limit to $18,000 starting in 1997, rising to $25,000 by 2003. (6) See Instructions to Form 4797, Sales of Business Property (Also Involuntary involuntary adj. or adv. without intent, will, or choice. Participation in a crime is involuntary if forced by immediate threat to life or health of oneself or one's loved ones, and will result in dismissal or acquittal. INVOLUNTARY. Conversions and Recapture Amounts Under Sections 179 and 280F(b)(2)), Part IV. (7) See Blue Book, note 1. p. 563. (8) According to Temp. Regs. Sec. 1.280F-6T(d)(2)(ii)(A), this provision applies only to the extent the use of listed property is by an individual who is a 5% owner or a related person with respect to the owner or lessee One who rents real property or Personal Property from another. A lessee of land is a tenant. Cross-references Landlord and Tenant. lessee n. the person renting property under a written lease from the owner (lessor). of the property, even if a fair rental rate is charged. (9) Temp. Regs. Sec. 1.280F-6T(d)(2)(ii)(A)(3) refers to "withholding under Chapter 24," which is income tax withholding. The personal use portion is subject to income, FICA FICA abbr. Federal Insurance Contributions Act Noun 1. FICA - a tax on employees and employers that is used to fund the Social Security system income tax - a personal tax levied on annual income , FUTA FUTA Federal Unemployment Tax Act (US) and Medicare taxes; see IRS Pub. 535 (1996), Business Expenses, p. 11. (10) For a detailed example. see "Tax Clinic, Should You Trade in That Luxury Car?," 27 The Tax Adviser 462 (Aug. 1996), p. 464. (11) IRS Pub. 917, note 4, p. 7. (12) Id., p. 11. (13) Id., p. 6. (14) Rev. Proc. 96-63, IRB IRB See: Industrial Revenue Bond 1996-53, 46. (15) IRS Pub. 917, note 4, p. 6. (16) Id., p. 4. EXECUTIVE SUMMARY * Currently, a "luxury automobile" is a PA costing at least $15,800. * The availability of accelerated depreciation and/or a Sec. 179 election hinges Hinges may refer to:
* The luxury limits can be avoided by purchasing a vehicle that is not a PA. |
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