Impact on Sport Utility Vehicle Purchases and Donation of Motor Vehicles, Boats, and Airplanes

On October 11, 2004, the American Jobs Creation Act of 2004 (the "Act") was passed by the Senate after clearing the House the previous week.  President Bush signed the bill on October 22, 2004.  This new law reduces the amount allowed to be expensed in regard to sport utility vehicles (SUVs).  This particular provision is effective as of October 22, 2004, and therefore will affect 2004 income tax returns and planning for 2004.

Prior to the law change, for tax years beginning in 2004, taxpayers could elect to expense under Code Section 179 up to $102,000 of the cost of eligible personal property that was used in the active conduct of a trade or business.  The maximum amount allowed to be expensed is generally phased out dollar-for-dollar by the amount of property in excess of $410,000 that was placed in service during the year.  In addition, the maximum amount allowed to be expensed is limited to the taxable income from any of the taxpayer's trades or businesses.  Any qualifying vehicles purchased prior to October 22, 2004, may be expensed under the old rules.

The amount that could be expensed for "listed property", such as cars, was allowed only if the "listed property" was used more than 50% in a qualified business and then only to the extent of the property's business use.  Qualified business use does not include the use of listed property as compensation for services by a 5% owner or a related person. 

"Passenger autos" are subject to limits on the amount that can be expensed or depreciated as "listed property."  However, these caps do not apply to cars or trucks with a gross vehicle weight rating of more than 6,000 pounds.  That meant taxpayers, which used the heavy SUVs 100% for business, can deduct up to the full cost of the SUV immediately as Code Section 179 expense assuming their cost was less than $102,000.

The new law applies to property placed in service October 22, 2004, or later.  The Act will cap the Code Section 179 expense deduction for vehicles with a gross vehicle weight rating of less than 14,000 pounds to $25,000.  For these purposes, an SUV is defined to exclude:

• any vehicle that is designed for more than nine   individuals in seating rearward of the driver's seat
• is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length
• has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

However, for vehicles placed in service on or before December 31, 2004, there is still a deduction for 50% of bonus depreciation on new SUVs that are used more than 50% for business.  For example, if you place a SUV in service on or before December 31, 2004, with a gross vehicle weight rating between 6,000 pounds and 14,000 pounds used at least 50% in the business that costs $60,000, there is still potentially a hefty write-off allowed in 2004.  First, there is the Section 179 expense of $25,000, and out of the remainder of the $35,000 cost, a deduction of $17,500 is available as bonus depreciation and another 20% of the remaining $17,500 is allowed as regular depreciation.  Therefore the total first-year write-off is $46,000, assuming 100% business use.

Therefore, it is important to accelerate purchases of SUVs, with a gross vehicle weight rating between 6,000 pounds and 14,000 pounds, so that they are placed in service on or before December 31, 2004, to take advantage of these remaining tax breaks.

In regard to charitable contributions of motor vehicles, boats, and airplanes made after 2004, the Act limits the allowable deduction.  The amount that is deductible depends on the charity's use of the vehicles.  There is also a higher substantiation requirement.  If the charity sells the vehicle without using the vehicle in any significant way, or without improving the vehicle, the amount of the charitable deduction cannot exceed the gross proceeds from the charity's sale of the vehicle.  In addition, if the vehicle has a value in excess of $500, the taxpayer must substantiate the contribution by a contemporaneous written acknowledgement from the charity and include the acknowledgement with the tax return on which the deduction is claimed.