Any Accountants Out There???

[Nancy]

You guys have confused this a little but bits and pieces in this thread have the correct info.

First, assume the vehicle is used for business purposes. If not used business none of this applies anyway. And it does not matter whether or not the business is incorporated, a partnership, sole proprietorship or what have you.

The "Section 179" deduction refered to is the (currently) allowed deduction for otherwise depreciable assets. This means you can expense this amount straight away instead of spreading it over a specific number of years. This applies to tangible personal property used in a trade or business, of which a car is one. Note that the deduction cannot exceed the taxable income derived from the business activity. In other words, the Section 179 deduction is the lesser of taxable income or $24,000.00

Additionally, President Bush signed into law last March, tax legislation that allows "bonus" depreciation of 30% for all qualifying assets first placed into service by the taxpayer after Sept. 11, 2001 and prior to Sept. 11, 2004.

After the above rules are exhausted, any remaining basis is depreciated over a specified period.

Above are the general rules for depreciable tangible assets used in a trade or business.

But....there is a special rule about cars. It's how the tax code tries to "soak the rich" just like with phase-outs on itemized deductions on personal returns. Cars are limited to about $3500 of depreciation a year. That's really only has an impact for high cost vehicles like Mercedes, BMWs, etc. And...it would apply to the H2 except for this little thing:

Ta da...while limiting the deduction for luxury vehicles they realized that their target would also catch farm tractors, heavy duty road equipment and the like, so the tax law says that limitation only applies to vehicles with a gross vehicle weight of LESS than 6,000 pounds. The H2 exceeds that weight so the luxury automobile depreciation limitation does not apply.

So we can do some numbers here. For simplicity, the H2 cost $60,000 to place into service. 100% business use. No other depreciable assets were bought during the year so the whole $24,000 Section 179 expense is applied to the H2. Now the basis is $36,000. Next we take the 9/11 bonus depreciation of 30% which is $10,800. After that, regular depreciation, 20% of the remainder is taken, or $6,960. This means the first year we can expense $41,760 of the car, leaving a depreciable basis of only $18,240 for future years. 40% of this you get to take in year 2.

And there you have the current tax impact of buying an H2 for business use. If your business use is less than 100% then the numbers are adjusted proportionately.

Very cool. But keep it quiet. If Congress figures this out, the jig will be up!

Nancy (CPA)