Vehicle Depreciation Highlights

Tax Law Changes

During 2010, President Obama signed into law two important new tax laws that offer significant benefits for business. The Small Business Jobs Act increases the amount of qualifying asset additions that can be expensed under §179. The 2010 Tax Relief Act permits the direct write-off of 100% of certain assets acquired after September 8, 2010 and before January 1, 2012.

Section 179 Expensing

• For tax years beginning in 2010 and 2011 the amount of asset additions that can be expensed under §179 is increased to $500,000. The deduction is phased out dollar-for-dollar when total qualifying additions are between $2,000,000 and $2,500,000, and can only be claimed to the extent the electing entity has net taxable income.
• For trade-ins, the carryover basis of the old asset to the new asset does NOT qualify for the expense deduction. Only the non-carryover basis of the asset acquired (i.e., the amount of cash paid) qualifies for the §179 deduction.
• §179 can only be claimed on SUVs and trucks with a loaded gross vehicle weight rating of more than 6,000 pounds. Heavy autos qualify too – but only if their curb weight (unloaded) tops 6,000 pounds. For vehicles 6,000 pounds or less, luxury auto limits apply to the amount that can be expensed.
• However, for SUVs with a GVWR greater than 6,000 pounds and less than or equal to 14,000 pounds, placed in service on or after October 22, 2004, the maximum amount that can be expensed under §179 is $25,000.
• State tax Provisions: Wisconsin follows the “old” Section 179 rules allowing $25,000 for 2010 with the phaseout occurring between $200,000 and $225,000.

Bonus Depreciation

• Bonus depreciation of 100% is allowed for qualified purchases after September 8, 2010 and before January 1, 2012. 50% bonus depreciation is allowed for qualified purchases after 2007 and before September 9, 2010. 
• For trade-ins, the full basis of the new asset qualifies for the bonus depreciation deduction. This includes the cash paid for the new asset as well as the carryover basis of the traded-in asset.
• Bonus depreciation can only be claimed on a vehicle used more than 50% of the time in a qualified business use (does not include any personal compensated use or rental by a 5% owner or related person).
• Bonus depreciation is available only for NEW property. Used property does not qualify.
• For vehicles 6,000 pounds or less, luxury auto rules limit the amount of the bonus depreciation deduction.
• As is the case with MACRS depreciation in general, bonus depreciation cannot be claimed on property placed in service and disposed of in the same tax year.
• State tax provisions: Most states do not follow the federal bonus depreciation.

§179 Benefit

• Potential for an immediate tax deduction from the purchase of a qualifying vehicle (GVWR > 6,000 lbs.)
• SUVs limited to $25,000

SUV Defined

• Four-wheeled vehicles having an unloaded gross weight in excess of 6,000 pounds and less than or equal to 14,000 pounds that are manufactured primarily for use on public roads.
• Any fully-enclosed vehicle with seating capacity behind the driver seat of up to nine persons and has a front end that protrudes 30 or more inches ahead of the leading edge of the windshield
• Any vehicle with a cargo bed less than six feet in length (this would include many of the popular “crew cab” trucks)

Bonus Depreciation Benefits

• Potential for an immediate depreciation deduction for 100% of the cost of a new qualifying vehicle purchased after September 8, 2010 and before January 1, 2012. 50% depreciation deduction of the cost of a new qualifying vehicle purchased after 2007 and before September 9, 2010.

SUV §179 Deduction and Bonus Depreciation Example

• Purchase a new SUV with a GVWR between 6,000 and 14,000 pounds for $70,000 and placing it in service on or before December 31, 2010
• Assume all business use, asset acquisition, and other qualifications are met 
• Take §179 of $25,000
• Take 100% bonus which is $45,000 on the remaining cost
• Total potential federal tax savings is $24,500 (35% x $70,000).

For more information, please contact Kevin Cherney (920.662.2860, kcherney@wipfli.com) or your Wipfli relationship executive with any questions or visit www.wipfli.com.

The information contained in this memo is general in nature and is intended to provide an update as to certain developments in the tax law. This information does not constitute, and should not be treated as, tax or business advice, and does not consider whether any particular item or strategy is appropriate for your situation, nor does it purport to analyze the effect any particular item or strategy might have on your specific situation. You should not attempt to apply any information contained in this memo without reviewing the specific situation with your tax advisor to ensure that all relevant facts are taken into account and both the tax and nontax consequences are adequately considered.

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