If you’ve been thinking about purchasing a new SUV to use in your real estate business, you should start looking now and make sure to purchase and place it in service before the end of 2011.
This way you can qualify for particularly generous tax write-offs — write-offs that are scheduled to be greatly reduced in 2012.
Indeed, you may be able to deduct the entire cost of the vehicle in a single year.
Here’s how it works: Whenever you purchase a vehicle to use in your business you are allowed to deduct the cost through depreciation, the same as for any other business equipment. However, this usually takes several years.
Indeed, depreciation of business vehicles is unique in one very important way: The annual depreciation deduction for automobiles is limited to a set dollar amount each year. The annual limit applies to all passenger vehicles, no matter how much they cost.
These limits are quite low. For example, for first-year depreciation of passenger automobiles placed in service in 2011, the limit is up to:
- $11,060 for the first year;
- $4,900 the second year;
- $2,950 the third year; and
- $1,875 for each successive year.
Moreover, this assumes you use the car 100 percent for business. If you use it for more than just business, you may only depreciate an amount equal to your percentage of business use. For example, if you use your car 60 percent for business, you may depreciate or expense only 60 percent of the cost.
However, these annual depreciation limits apply only to passenger automobiles, which are vehicles with a gross loaded weight of less than 6,000 pounds.
Heavy sport-utility vehicles — those that are built on a truck chassis and are rated at more than 6,000 pounds gross (loaded) vehicle weight — are not subject to these limits.
So if you’re in the market for an SUV, this is the year to buy it because of that special bonus depreciation. For 2011 only, you can use bonus depreciation to deduct 100 percent of the cost of many types of business property in a single year. There is no dollar limit on this deduction.
Using bonus depreciation, you may be able to deduct all or most of the cost of an SUV weighing 6,000 pounds or more in a single year — a potentially enormous deduction. If an over-6,000-pound SUV is placed in service during the period from Sept. 8, 2010, through Dec. 31, 2011, it will qualify for 100 percent first-year bonus depreciation.
This means you can deduct 100 percent of the cost in one year if you use the vehicle 100 percent for business.
For example, if you buy and place in service a new $75,000 heavy SUV during 2011, and use it 100 percent for your real estate business, you may write off the entire cost on your 2011 tax return.
To qualify, just make sure the vehicle weighs more than 6,000 pounds. Michelle Chiou, a real estate broker who purchased a Honda minivan for her business, learned this the hard way. The Internal Revenue Service claimed that her minivan weighed less than 6,000 pounds because it had a listed gross vehicle weight of only 5,953 pounds.
Fortunately, Chiou purchased the minivan with five accessories: all-season floor mats that weighed 18 pounds, cargo boards that weighed 10 pounds, a cargo tray that weighed 6 pounds, a third-row sunshade that weighed 8 pounds, and a cargo mat that weighed 10 pounds.
The combined weight of the five accessories was 52 pounds, and when added to the minivan’s gross vehicle weight of 5,953 pounds, the total was 6,005 pounds. As a result, the Tax Court found that the minivan was not a passenger vehicle for tax purposes and the annual depreciation limits didn’t apply (see Engle v. Commissioner, 2009 Tax Court Summary Opinion 138).
However, it won’t be possible to use bonus depreciation if you use the SUV less than 51 percent for business or if you bought the car used. In this event, you must depreciate the entire cost under the regular rules.
You’ll have to use the slowest method of depreciation (the straight-line method) if you use the car less than 51 percent for business, and you’ll have to continue with this method even if your business use rises over 50 percent in later years.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.