When bonus first-year depreciation deductions end at the close of 2004, so will the extra first-year dollar limit for autos, light trucks and vans subject to the luxury auto rules.
Under the basic luxury auto rules, the maximum depreciation deduction allowance (including the amount allowed under the expense election) for passenger autos (other than vans, trucks and electric vehicles) bought in 2004 is $2,960. However, if the auto is qualified property (defined below), the first-year depreciation deduction is increased by $7,650. Thus, the total depreciation allowed in 2004 is $10,610. If the auto is not bought until 2005, the extra allowance would not be available.
As I'm writing this article, the Internal Revenue Service has not yet released the inflation-adjusted basic first-year depreciation allowance for luxury autos for 2005, but in all likelihood it will not be much different from the amount allowed for 2004.
If the vehicle being bought is a van or truck that meets the definition of a passenger auto (defined below), the basic first-year depreciation allowance for 2004 is $3,260 instead of $2,960. The extra allowance if the van or truck is qualified property is the same $7,650 that is allowed for passenger autos (other than electric ones). Thus, the total depreciation allowance for 2004 if the van or truck is qualified property is $10,910.
If the auto being bought is an electric vehicle, i.e., a vehicle that is propelled primarily by electricity, the basic first-year depreciation allowance is triple that allowed for a non-electric passenger auto that is not a van or truck. Thus, the basic depreciation allowance for 2004 is $8,880 (three times $2,960). If the electric vehicle is qualified property, the extra allowance is also triple the extra allowance for a non-electric auto. This makes the extra allowance $22,950 (three times $7,650), and the total first-year depreciation allowed for an electric vehicle bought in 2004 that is qualified property is $31,830 ($8,880 plus $22,950).
Example 1: Your client is planning to buy a new minivan that meets the definition of qualified property for use solely in his business for about $30,000. If he buys it in 2004, he can deduct first-year depreciation of $10,910 on his tax return for that year. If he waits until 2005 to buy it, and the basic first-year depreciation allowance for 2005 is the same as in 2004, he will be able to deduct first-year depreciation of only $3,260 on his tax return for that year.
Example 2: Your client is planning to buy an electric auto that is qualified property for use solely in her business for about $90,000. If she buys the electric auto in 2004, she can deduct first-year depreciation of $31,830 on her tax return for that year. If she waits until 2005 to buy it, and the basic first-year depreciation allowance for 2005 for electric vehicles is the same as in 2004, she will be able to deduct first-year depreciation of only $8,880 on her tax return for that year.
Observation: Note that the basic first-year depreciation allowance does not always go up from one year to the next. For 2003, the basic first-year depreciation allowance for passenger autos (other than vans and trucks) was $3,060, or $100 more than in 2004. The basic first-year depreciation allowance for passenger autos that are vans or trucks was also $100 higher in 2003 ($3,360) than in 2004 ($3,260).
Caution: The dollar limits must be reduced proportionately if business/investment use of a vehicle is less than 100 percent. Thus, if your client, in Example 1, used the new minivan only 70 percent of the time for business, the first-year depreciation deduction would be limited to $7,637 (70 percent of $10,910) if he bought it in 2004, and to $2,282 (70 percent of $3,260) if he bought it in 2005.
Passenger auto defined
For purposes of the rules that limit depreciation deductions (and expense deductions) on passenger autos, a vehicle is a passenger auto if the vehicle is any four-wheeled vehicle which is manufactured primarily for use on public streets, roads and highways, and is rated at an unloaded gross vehicle weight of 6,000 pounds or less.
However, in the case of a truck or van, the above 6,000-pound weight test is applied to the truck or van's gross vehicle weight rather than its unloaded gross vehicle weight. Thus, a light-duty truck may be a passenger auto.
However, certain vehicles are specifically exempted from being classified as passenger autos, and, accordingly, are not subject to the first-year depreciation (or expensing) limits on luxury autos. These include ambulances, hearses, vehicles used by the taxpayer directly in the trade or business of transporting persons or property for compensation or hire, delivery trucks with seating only for the driver, and special-purpose farm vehicles.
Qualified property defined
A passenger vehicle bought in 2004 is qualified property eligible for the additional first-year depreciation allowance only if:
* The original use of the property (i.e., the first use to which the auto is put) began with the taxpayer;
* The property is acquired before Jan. 1, 2005; and,
* The property is placed in service before Jan. 1, 2005.
Thus, a used (pre-owned) auto cannot be qualified property.
Caution: If a buyer pays for an auto and takes title to it before 2005, she will still not qualify for the extra first-year depreciation allowance if it is not placed in service in 2004. Thus, if the auto is not available for the buyer's use at the time she pays for it, e.g., it has to be shipped from the manufacturer, the buyer won't get the extra allowance unless she actually receives the auto and starts to use it in her business before 2005.
Accordingly, recommend to your clients that they don't wait until late in December to start looking for a passenger auto to be used for business purposes.
Bob Rywick is an executive editor at RIA, in New York, and an estate planning attorney.
