Tax Guru – Ker$tetter Letter

From a client with a 3/31/09 corp year-end:

Dear Kerry:

Our corp is considering purchasing a van such as a delivery van (GMC, Chevy, etc.). 

Could you please inform me of the IRS specifications that must be met to allow us to expense the entire amount.

Before we would purchase the vehicle I will check with you to make sure it meets the requirements.

Thanks.

My reply:

As you requested, here are the specifications for what a vehicle has to have in order to qualify for deducting all of its cost in the first year. Basically, these rules are most important if a vehicle either weighs less than 6,000 pounds or costs less than $25,000.

I excerpted this from my main tax reference source, TheTaxBook. Section 280F is the part of the tax code that severely limits the deprecation deduction for vehicles.

Vehicles not subject to Section 280F. The following vehicles are not subject to the depreciation limitations under Section 280F or any of the other listed property rules:
• Clearly marked police and fire vehicles.
• Unmarked vehicles used by law enforcement officers if the use is officially authorized.
• Ambulances used as such and hearses used as such.
• Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo.
• Bucket trucks (cherry pickers), cement mixers, dump trucks, garbage trucks, flatbed trucks, and refrigerated trucks.
• Combines, cranes and derricks, and forklifts.
• Qualified specialized utility repair trucks.
• Tractors and other special purpose farm vehicles.
• A vehicle used directly in the business of transporting persons or property for pay or hire, including school buses, and other buses with a capacity of at least 20 passengers.
• A truck or van that is a qualified nonpersonal-use vehicle.

Qualified nonpersonal-use vehicles.
These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. They include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company’s name. Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat, are qualified nonpersonal-use vehicles.

Trucks and vans.
Trucks and vans are passenger autos built on a truck chassis, including minivans and sport utility vehicles (SUVs) that are built on a truck chassis. They have the same definition as passenger autos, except that instead of unloaded gross vehicle weight, the definition is gross vehicle weight not more than 6,000 pounds. The Section 280F depreciation limits for trucks and vans are higher than the limit for cars.

Vehicles over 6,000 pounds.
Passenger autos rated at more than 6,000 pounds unloaded gross vehicle weight, or trucks and vans rated at more than 6,000 pounds loaded gross vehicle weight are not subject to the Section 280F depreciation limits. However, such vehicles may still be considered listed property for purposes of the other listed property rules, including the requirement that the vehicle be used more than 50% for business to take the Section 179 deduction.

Remember that the expensing deduction is only allowed if you actually place the vehicle into service before the end of your tax year. It won’t be sufficient to prepay for it by March 31 and then take delivery later in your next fiscal year. You need to actually use it before the end of the day on March 31 in order to claim it on this year’s tax return.

I hope this helps. Let me know if you have any specific questions.

Kerry

Follow-up:

Kerry:

Could you please let me me know if any or all of the following vehicles qualify for deducting all of the cost in the first year.

1)  2009 GMC Sierra 2500 crew cab pickup.  GVWR = 9600 lbs.  Bed length = 77 inches.  This is the same model we purchased nd were able to deduct in 2006.  Price = $39,480

2)  2009 GMC Savanna 12 passenger van.  GVWR = 9600 lbs.  The seats can be removed.  Price = $33,027

3)  The dealer also has the same model 2008 GMC Savanna available for about $21,000

Thanks.

My Reply:

I looked over the vehicle descriptions you faxed over and compared them to the rules for the first year expensing.

1.  Because the 2009 GMC Sierra has an exterior bed of larger than 72 inches, it would qualify for deducting the entire purchase price of $39,480 plus the sales tax.

2.  Because the 2009 GMC Savanna has seats for so many people, it would only qualify for a first year deduction of $25,000 of its purchase price.  The remaining cost would be depreciated over five years.

3.  Because the 2008 GMC Savanna costs less than the $25,000 limit, its entire $21,000 purchase price plus sales tax could be expensed in the first year.

Besides the fact that the vehicle needs to be actually placed into service before the end of 3/31/09, which I mentioned last time, another important point is that the dollar figure we are working with is after deducting any trade in value the dealer may give you if you are swapping another vehicle for the new one.  For example, with vehicle number 1 above, if you are receiving a trade in credit of $10,000, only the net cost of $29,480 will be available to deduct in the first year.

I hope this is clear and not too confusing.  Let me know if you have any more questions.

Kerry