Despite the tax cuts of recent years, many distributors and jobbers with fleets find it hard to fully recover the cost of their work vans and trucks. Because of “luxury car” caps, few vans and light trucks could be completely written off. Recently, however, the Internal Revenue Service issued new regulations that exempt vans and light trucks from the depreciation limits imposed on passenger automobiles.
No longer will your work vehicles be denied a depreciation write-off equal to their full cost. The IRS has provided guidelines to help you reap the maximum write-off and make the regulations retroactive.
As originally written, the tax law limited the annual depreciation deduction for passenger automobiles to discourage overspending on vehicles purchased for use in a trade or business. For the 2003 tax year, for example, these so-called “luxury car” limitations delayed a portion of the otherwise allowable depreciation deduction for passenger automobiles with a purchase price above $15,300, meaning larger vehicles like fleets.
Fleets that were used more than 50 percent for business purpose that fully qualified for tax writeoffs, were subject to deduction limits because of what the tax rules labeled “passenger automobiles.” It is currently defined as any four-wheeled vehicle manufactured for use on public streets, roads and highways that has an unloaded gross vehicle weight of 6,000 lbs. or less. A truck or van has, until now, been treated as a passenger automobile if the weight is 6,000 lbs. or less.
Few light truck and van fleet owners recover basic automobile expenses come tax time, though many who own passenger cars do. It is only recently that the IRS recognized that these vehicles generally cost more, even though they were still subject to the same “luxury car” depreciation limits.
Unfortunately, the IRS does not have the authority to simply raise the limits for deductions on van and light truck costs; they did, however, issue inflation-adjusted dollar limits for vehicles placed in service in 2003, reflecting a higher rate of price inflation for vans and light trucks.
This action, when combined with the increases in the first-year depreciation limits for all new passenger automobiles (including vans and light trucks) under the recent tax cut bills, will provide some relief. For example, if you choose the 50-percent additional first-year depreciation permitted under the Jobs and Growth Tax Reconciliation Act of 2003, you can recover the full price of a new automobile costing nearly $23,000 over the five-year recovery period.
The IRS and the Treasury have now concluded that a limited exclusion from the luxury tax definition of passenger automobiles might be warranted for light trucks or vans unsuitable for personal use.
It’s not a perfect solution, but the new rules now exclude any truck or van that qualifies as a so-called “nonpersonal use vehicle” and they define that as any vehicle that by design is not likely to be used more than a minimal amount for personal purposes. Their list includes any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 lbs.
Also exempt is any pickup truck or van that has been specially modified in a manner that it, too, is unlikely to be for extensive personal use. For example, a van that has only a front bench for seating and permanent shelving installed in the cargo area, that carries equipment and has been painted with advertising or the company’s name, fits this description.
The IRS says these specially modified vehicles don’t provide significant elements of personal benefit so they can be excluded from the luxury car definition.
These new regulations are retroactive and apply to vehicles placed in service on or after July 7, 2003. In fact, the IRS has amended the effective date provision to allow the exclusion for qualified, nonpersonal use vehicles that were placed in service prior to July 7, 2003 — but on or after January 1, 2003.
These amendments permit you to either amend previously filed tax returns for open tax years or to treat the change as a change in method of accounting by filing Form 3115, Application for Change In Accounting Method.
Now, the IRS has not only acknowledged that deduction caps have long prevented many jobbers and distributors from recovering the full cost of vans and light trucks, it has created new ground rules to correct that inequality.
