Luxury automobile exclusion regs.

• Author: Beck, Allen M.

Temporary and proposed regulations (TD 9069, 8/6/03) were recently issued to exclude certain vans and light trucks from the depreciation limits imposed on luxury automobiles. The rules apply to property placed in service after July 6, 2003.

Discussion

Sec. 280F(a) limits the depreciation allowable on luxury automobiles to standard inflation-adjusted amounts prescribed by the IRS. Currently, the allowable first-year depreciation deduction for luxury automobiles is $10,710 (including $7,650 in bonus depreciation allowed by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)). The deductions allowed in the second and third years are $4,900 and $2,950, respectively. Annual depreciation continues at $1,775 for each succeeding year until the cost of the automobile is fully recovered; see Rev. Proc. 2002-14. These limits apply even if the taxpayer elects to expense the vehicle under Sec. 179.

With few exceptions, all passenger automobiles (as defined in Sec. 280F(d)(5)(A)) are subject to the luxury automobile limits. This provision defines "passenger automobile" as any "4-wheeled vehicle ... which is manufactured primarily for use on public streets, roads, and highways, and ... is rated at 6,000 pounds unloaded gross vehicle weight or less" (in the case of trucks or vans "gross vehicle weight" (GVW) replaces "uploaded gross vehicle weight"). As a result of this definition, a multitude of vehicles ate subject to the luxury automobile limits. An exception applies to large trucks and SUVs with GVWs in excess of 6,000 pounds. Under the new temporary regulations, discussed below, certain vans and light trucks are also excluded from the definition of passenger automobile and, thus, are not subject to the aforementioned depreciation caps.

Temp. and Prop. Regs.

Under the luxury automobile limits, a vehicle with a valid business purpose cannot be fully depreciated over the standard five-year recovery period. For example, using the above limits, it would take 10 years to fully recover the cost of a $30,000 van or light truck. The temporary regulations will help to prevent that, by excluding from the definition of passenger automobile any van or truck that is a "qualified non-personal use vehicle" (as defined in Temp. Regs. Sec. 1.274-5T(k)(2)). This regulation defines a "qualified nonpersonal use vehicle" as any vehicle which, by reason of its nature (i.e., design), is not likely to be used more than a de minimis amount for personal purposes...