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GREAT BIG CARS, THE NEW TAX LAW, AND YOU

May 30, 2003

The new tax law provides for an increase in the "Section 179" deduction to $100,000 per year and an increase in the "bonus" first year depreciation on new property to 50% of its cost. These changes bring into sharp focus an anomaly in the tax laws treatment of company-owned vehicles.

The tax law doesn't like company cars. Special depreciation limits apply, for example, even if there is over 50% "qualified business use"; under the new law, the 50% expensing and Sec. 179 deduction of new property is limited to $10,710 per automobile.

BUT SUV'S ARE DIFFERENT

Life has passed our tax law by since these rules were enacted in 1984. The rules define "automobile" for this purpose as vehicles under 6,000 lbs gross vehicle weight. Back then, that meant everything but big trucks. The emergence of the sport-utility vehicle has resulted in many company cars weighing over $6,000 lbs; such vehicles are not subject to the limits. The entire cost of a $100,000 Hummer, for example, might be written off as Sec. 179 deduction, if the company's fixed asset additions do not exceed $400,000 in 2003.

BE CAREFUL

The temptation for some taxpayers will be to go hog wild on this deduction. Remember, the IRS is not buying the vehicle - even if you get a full deduction, the company is still out of pocket for 65% of the vehicle cost. If you don't use the vehicle in a trade or business, you get no deduction at all.

Also, any personal use has to be added to the employee's W-2. The tax law requires the employee to document business use for any amount of vehicle cost not on the W-2. Commuting to work is not "business use."

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