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Deducting 100% of the Cost of Certain Vehicle Purchases

Businesses can once again deduct up to 100% of the purchase price of new sports utility vehicles (SUV). The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted December 17, 2010, allows bonus depreciation of 100% on the purchase of new assets placed in service between September 9, 2010 and December 31, 2011. This law applies to an SUV and would allow a business to fully deduct the purchasing price of an SUV in the year placed in service.

Prior to the 2010 act taking effect, taxpayers were limited in the amount of depreciation they could take on the purchase of an SUV. The American Jobs Creation Act of 2004 allowed for a Section 179 deduction on the purchase of an SUV of up to $25,000. The taxpayer could then elect bonus depreciation or regular depreciation on the remaining cost of the vehicle above the $25,000 threshold. For example, on the purchase of a $60,000 SUV, the business could deduct up to $46,000 in the first year ($25,000 Section 179 deduction, $17,500 bonus depreciation on the remaining basis after taking Section 179 plus $3,500 first-year depreciation on the remaining basis after deducting both Section 179 and bonus depreciation). With the creation of 100% bonus depreciation, businesses do not need to elect Section 179 and now can take 100% bonus depreciation on the asset, allowing a full deduction of the $60,000 cost in the year placed in service. 

A “sport utility vehicle” is any 4-wheeled vehicle that is (1) primarily designed, or can be used, to carry passengers over public streets, roads, or highways; (2) rated at 6,000 pounds unloaded gross weight or more; and (3) rated at not more than 14,000 pounds gross vehicle weight.

Passenger vehicles weighing less than 6,000 pounds are not considered qualified property under the new modification to bonus depreciation. Their depreciation deduction is still limited in 2010 and 2011 to $11,160 in the first year. This makes the purchase of an SUV more appealing for tax purposes compared with a passenger vehicle at the same price. 

For those considering taking advantage of this tax revision, the disposal of the vehicle should be considered. Selling the vehicle after a 100% bonus has been taken would subject the taxpayer to ordinary income tax on the gain. To avoid the ordinary income treatment, the business should consider trading in the vehicle, as it would qualify as a tax-deferred like-kind exchange. 

If you have any questions, please contact Craig Maksymiak at cmaksymiak@BlackmanKallick.com or 312-980-2977, Kristin Bonnett at kbonnett@BlackmanKallick.com or 312-980-3327, or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.