Size Matters to the IRS

BY MARC L. LEBOW AND MICHAEL MCLAIN

The size of the automobile you buy for business use matters to the IRS. In fact, there is a tax benefit to purchasing a heavier, less fuel-efficient automobile. The annual depreciation deduction for most automobiles used in a trade and business is subject to the limited luxury automobile rules (LLAR), which limit the amount of depreciation that can be taken annually on a luxury automobile under the modified accelerated cost recovery system (MACRS) rules. The normal MACRS life for an automobile is five years, but since the amount of LLAR limits the annual deduction, the depreciable life of the vehicle is extended. If the taxpayer purchases a $20,000 automobile subject to LLAR, it must be depreciated over eight years, which is longer than most drivers keep their business vehicles.

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.

Depreciation for $20,000 Car



Year
Annual
depreciation
charge under
LLAR
Annual
depreciation
charge under
MACRS
Annual
depreciation
under
section 179
1999 $ 3,060 $ 4,000 $19,200
2000 $ 5,000 $ 6,400 $ 320
2001 $ 2,950 $ 3,840 $ 192
2002 $ 1,775 $ 2,304 $ 115
2003 $ 1,775 $ 2,304 $ 115
2004 $ 1,775 $ 1,152 $ 58
2005 $ 1,775    
2006 $ 1,775    
2007 $ 115    
TOTAL $20,000 $20,000 $20,000

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.

—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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