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NEW DEPRECIATION LIMITS FOR CARS, TRUCKS AND VANS

March 29, 2004

The tax law has imposed special limits on depreciation for vehicles since the Reagan administration. The limits are revised annually for inflation. The IRS has just published the inflation-adjusted depreciation rates for 2004 (Rev. Proc. 2004-20)

For the first time, the IRS has published different limits for trucks and vans to reflect "the higher rate of price inflation that trucks and vans have been subject to since 1988." The higher limits apply SUVs, pickups and full-size van.

If the vehicle is eligible for bonus depreciation (that is, if it is new), it is subject to higher limits.

The limits for vehicles placed in service in 2004 are set out in the tables below.

Automobiles using bonus first-year
depreciation 

         Tax Year                                Amount 

         1st Tax Year                          $10,610
         2nd Tax Year                           $4,800
         3rd Tax Year                           $2,850
         Each Succeeding Year                   $1,675

Trucks and vans using bonus first-year
depreciation

         Tax Year                              Amount

         1st Tax Year                          $10,910
         2nd Tax Year                           $5,300
         3rd Tax Year                           $3,150
         Each Succeeding Year                   $1,875

Automobiles not using bonus depreciation

         Tax Year                                Amount

         1st Tax Year                            $2,960
         2nd Tax Year                           $4,800
         3rd Tax Year                           $2,850
         Each Succeeding Year                   $1,675

Trucks and vans not using bonus first-year depreciation

         Tax Year                               Amount

         1st Tax Year                            $3,260
         2nd Tax Year                           $5,300
         3rd Tax Year                            $3,150
         Each Succeeding Year                    $1,875

Rev. Proc. 2004-20 also has depreciation limits for electric vehicles.

The tax law also has a provision to limit the tax avoidance possiblities of leasing vehicles to get around the depreciation limits. Taxpayers using leased vehicles have to add an amount to income. The Revenue Procedure has the updated lease add-back tables for vehicles placed in service in 2004.

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