Sec. 179 Recapture and SUVs.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 increased the maximum dollar limit for Sec. 179 expensing to $100,000 for tax years beginning in 2003-2005 (as adjusted for inflation, $102,000 for 2004 and $105,000 for 2005). Prior to enactment of the American Jobs Creation Act of 2004, certain large sport utility vehicles (SUVs) were eligible for this benefit, due to exemptions from the Sec. 280F "luxury car" rules.

The increase in the Sec. 179 limits, combined with the exemptions under Sec. 280F, provided a substantial incentive for many taxpayers to purchase large SUVs in 2003 and 2004. Taxpayers were allowed a much-publicized tax deduction for purchasing an SUV; many took the opportunity.

However, in 2004, gasoline prices reached record levels. By May 2004, the average U.S. price of gasoline was approaching $2 per gallon. Due to the increase in the cost of operating large SUVs, many taxpayers may decide to reduce their business use of these vehicles, or sell or trade them in for more fuel-efficient vehicles. Although there may be logical reasons justifying reduced use and/or disposition of an SUV, such action is not without a price--triggering the Regs. Sec. 1.179-1(e) recapture rules.

Recapture

That regulation provides that if Sec. 179 property is not used predominantly in a trade or business at any time before the end of the property's recovery period, the taxpayer must recapture any benefit derived from expensing it, on Form 4797, Sales of Business Property (Also Involuntary Conversions and Recapture Amounts Under Sections 179 and 280F(b)(2)). Recapture is required in the year the property ceases to be so used. The benefit to be recaptured is the excess of the amount expensed under Sec. 179 over the amount that would have been allowable as depreciation under Sec. 168 for all prior tax years (including the recapture year).

Additionally, large SUVs are listed property under Sec. 280F(d)(4); thus, recapture of excess depreciation will be required in the first year the vehicle is used 50% or less in a trade or business.

Advice

Tax practitioners should review their files for clients who may have elected Sec. 179 for large SUVs in recent years and advise them of the potential issues on a change in use or a disposition. Recapture or gain recognition could offset any cost savings associated with such a change in use, and may affect a taxpayer's decision. FROM DANNY SNOW, CPA, MEMBER IN CHARGE, TAX DEPARTMENT, THOMPSON DUNAVANT PLC, MEMPHIS, TN

Mark H. Ely, J.D., CPA

Partner

Washington National Tax

KPMG LLP 

Washington, DC