QBU rules for luxury automobiles.

• Author: Koppel, Michael D.
• Position: Qualified business use

Most tax advisers are familiar with the greater-than-50% business use requirement for listed assets, including luxury automobiles. The qualified business use (QBU) rules are quite stringent and somewhat complicated.

Overview

Sec. 280F limits depreciation for "luxury automobiles" (passenger vehicles exceeding a purchase price of $15,200); depreciation is further limited when the QBU is 50% or less. Exhibit 1 at right lists the 2003 depreciation caps (including Sec. 179 expense) for luxury automobiles with greater-than-50% QBU (see Rev. Proc. 2003-75).

QBU

Section 280F(b)(3)'s QBU test must be met annually, and must be supported by a contemporaneous log. If QBU slips below 50% in any year, Sec. 280F(b)(2) states that any depreciation (including Sec. 179 expense) must be recaptured to the extent it exceeded the alternative modified accelerated cost recovery system (MACRS) depreciation required for listed property with less-than-50% business use.

Under Temp. Regs. Sec. 1.280F-3T(e), alternative depreciation is calculated using the Sec. 168(g) straight-line method over the asset's earnings and profits (E&P) life. The E&P life, in the case of an automobile otherwise deemed five-year property, is 12 years, significantly restricting depreciation. Sec. 179 and bonus depreciation are not available for an automobile that fails the QBU test.

"QBU" generally means use in a taxpayer's trade or business, but it does not apply to use in a real estate investment business. According to Temp. Regs. Sec. 1.280F-3T, QBU does not include use in an investment or other activity conducted for the production of income within the meaning of Sec. 212.

Under Sec. 280F(d)(3), QBU includes all personal or business use by employees, but only if personal use is reported as compensation to the employee and withheld on by the employer. However, according to Sec. 280F(d)(6)(C), personal use by 5%-owners and related parties, although included in compensation, is not QBU.

Not only is QBU used to determine the depreciation limits of listed property, but also Sec. 179 property. Property purchased for use in other than an active trade or business does not qualify for Sec. 179 treatment.

Weight

Sec. 280F(d)(5)(B) provides that vans and trucks that have been specially modified so that they are not likely to be used more than minimally for personal purposes are exempt from the luxury automobile depreciation limits. Under Sec. 280F(d)(5), vans and trucks rated at over 6,000 pounds...