Size matters to the IRS.
However, heavier automobiles are not subject to LLAR. A $20,000 automobile, whose gross vehicle weight is more than 6,000 pounds, for example, can be depreciated over its expected five-year life. The IRS, however, limits the taxpayer to only a half-year's depreciation in the year of purchase and a half-year's depreciation in the sixth year. The tax benefits of purchasing the larger vehicle thus are clear (see exhibit below). For example, in 1999, the difference between the depreciation that could have been taken if a $20,000 automobile was subject to LLAR or not was almost $1,000.
To further complicate the calculation, in the year of purchase, the taxpayer can elect to take a first-year accelerated deduction under section 179, Election to Expense. This election must be taken in the year the automobile is purchased, and it allows the taxpayer to deduct $19,200 of a $20,000 automobile that first year. The taxpayer then deducts the balance ($800) of the cost of the automobile over the remaining five-and-one-half-year life of the automobile as allowed by MACRS. Even though the annual deduction is very small, it must be stretched over the entire life of the automobile.
The depreciation calculations under the three plans are illustrated in the exhibit below.
Since most taxpayers want to enjoy the tax advantages of accelerated depreciation and do not keep automobiles for eight years, they may be better off purchasing vehicles not subject to LLAR.
Tax practitioners should advise clients of the benefits of purchasing heavy vehicles for business use. Many sport utility vehicles (SUVs), vans and large trucks meet the weight requirements. For example, the lightest Chevy/GMC Suburban weighs 6,800 pounds and may go to a beefy 8,600 pounds depending on the options selected. Some vehicles may or may not meet the weight limit. For example, the Chevy Astro/GMC Safari Van ranges from 5,600 pounds to 6,100 pounds depending on the options. Automobile weights can be obtained from the manufacturer or dealer selling the vehicle.
Depreciation for $20,000 Car
Annual depreciation Annual depreciation Year charge under LLAR charge under MACRS 1999 $ 3,060 $ 4,000 2000 $ 5,000 $ 6,400 2001 $ 2,950 $ 3,840 2002 $ 1,775 $ 2,304 2003 $ 1,775 $ 2,304 2004 $ 1,775 $ 1,152 2005 $ 1,775 2006 $ 1,775 2007 $ 115 Total $20,000 $20,000 Annual depreciation Year charge under LLAR 1999 $19,200 2000 $ 320 2001 $ 192 2002 $ 115 2003 $ 115 2004 $ 58 2005 2006 2007 Total $20,000
--Marc I. Lebow, CPA, PhD, and P. Michael McLain, CPA, DBA, assistant professors of accounting at Hampton University School of Business, Hampton, Virginia.
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|Title Annotation:||depreciation of business-use vehicles|
|Author:||Lebow, Marc I.|
|Publication:||Journal of Accountancy|
|Date:||Jul 1, 2000|
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