With Chrysler set to close nearly 800 dealerships by June 9 and auto sales in a slump, many small business owners are tempted by fire-sale prices offered by dealers seeking to offload inventory. A number of tax provisions may help make a new car or truck more affordable. Some are deducted in figuring your taxable income, while others are credits against your tax bill.
If your business buys the vehicle, you may be able to take a chunk of the cost as a deduction against current income. Generally, when a business buys a depreciable asset it must write the cost off over the useful life, which for vehicles is five years. However, a larger portion of a vehicle’s cost may be eligible for immediate deduction under Section 179 of the tax code and bonus depreciation rules included in stimulus and job creation legislation.
If the vehicle is outfitted specifically for business – as a delivery vehicle or to carry tools, for example – and is not suitable as a passenger vehicle, the entire cost may qualify for the Section 179 deduction, up to $250,000 for tax year 2009. For passenger vehicles, the depreciation deduction (including a 50 percent first-year bonus enacted as part of 2008 and 2009 economic stimulus packages) is limited to $10,960 for cars and $11,060 for vans and trucks.
If the vehicle is used for business less than full-time, the deduction is determined by multiplying the limitation amount by the percentage the automobile is used for business.
Electric and Alternative Fuel Vehicles
Under the 2008 and 2009 economic stimulus and recovery laws, plug-in electric vehicles may qualify for new tax credits of up to $2,500 for two- or three-wheeled vehicles and $15,000 for vehicles with at least four wheels. The credit for low-speed vehicles with two or three wheels purchased before Jan. 1, 2012, amounts to 10 percent of the purchase price up to $25,000. The maximum credit for vehicles with at least four wheels depends on the weight of the vehicle. Vehicles manufactured primarily for off-road use, such as golf carts, do not qualify for either credit, according to the IRS Web site.
If you buy a vehicle that runs on alternative fuels, either for your business or as a personal-use vehicle, you may be eligible for a tax credit that’s been in place since 2005. Alternative fuels are compressed or liquefied natural gas, liquefied petroleum gas, hydrogen, or any liquid fuel that is at least 85 percent methanol. For passenger vehicles, this credit begins to phase out after the calendar quarter in which the manufacturer’s sales reach 60,000 units. In mid-May 2009, the credit for 2010 Ford Fusion and Mercury Milan hybrids was $3,400, according to the IRS Web site. Credits ranging from $1,550 to $3,000 were available for various 2009 models.
Credits on purchases of heavy hybrids and qualified alternative fuel motor vehicles for business use can be as high as $32,000. These tax credits were enacted as incentives to get high-emission vehicles off the road, according to Tom Roche, a principal in the CPA firm Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC. Roche advises clients who are buying hybrids subject to the 60,000-unit cap to “get something in writing or from the IRS Web site at the time you buy the vehicle to make sure you’ll be eligible for the credit.”
Personal Vehicles Used in Business
Some business owners may find it more beneficial to title personal-use vehicles in their own name and take a mileage or actual-expense deduction from business revenues to account for the business use. This is approach is particularly useful if the vehicle is used for business less than half the time. For those who have a choice of titling in the business or personally, Roche suggests talking with your insurance agent, as insurance rates may be higher for business vehicles.
The stimulus legislation affords individuals a new tax break for buying vehicles this year: an above-the-line deduction for sales and/or excise taxes paid on new vehicles purchased between Feb. 17, 2009 and Dec. 31, 2009. This deduction, which applies to taxes on the first $49,500 of the vehicle’s purchase price, is available to single taxpayers making less than $135,000 a year and married taxpayers making less than $260,000. Vehicles that qualify include cars, sport-utility vehicles, light trucks, motorcycles, and motor homes weighing up to 8,500 pounds.