IRS does fleets a favor: government issues a writeoff for vans and light trucks
Published in: Pest Control
Date: 8/1/2004
By: Battersby, Mark
Despite the tax cuts of recent years, many pest management professionals find it hard to fully recover the cost of their work vans and trucks. Thanks to the “luxury car” caps placed on the amount that may be claimed as a depreciation deduction, few vans and light trucks could be completely written off. Recently, however, the Internal Revenue Service issued new regulations that exempt vans and light trucks from the depreciation limits imposed on passenger automobiles.
The IRS has finally recognized that vans and light trucks are different from passenger vehicles. No longer will the vans and light trucks used in your business be denied a depreciation writeoff equal to their full cost. The IRS has also provided guidelines to help you reap the maximum writeoff for those business-use vehicles and made the new regulations retroactive.
As originally written, the tax law limits the annual depreciation deduction for passenger automobiles to discourage overspending on passenger automobiles purchased for use in a trade or business. For the 2003 tax year, for example, these so-called “luxury car” limitations delayed a portion of the otherwise allowable depreciation deduction for passenger automobiles with a purchase price above $15,300.
Tax rules and your vehicle
Cars and other forms of transportation that our lawmakers believe might lend itself to personal use (such as airplanes, trucks, boats, etc.) are considered to be “listed” property. As such, unless used more than 50% for business, the depreciation deductions are restricted.
And, even though used more than 50% for business purposes and fully qualifying for tax writeoffs, there are those deduction limits for what the tax rules label “passenger automobiles.”
These further limits (the “luxury car” deduction limits) are based on 100% business use. Naturally, if business use is less than 100%, the limits must be reduced to reflect the actual percentage of business use.
When it comes to limit on the amount that may be deducted, a passenger automobile is defined as any four-wheeled vehicle manufactured for use on public streets, roads and highway that has an unloaded gross vehicle weight (that is, maximum total weight of a loaded vehicle as specified by the manufacturer) of 6,000 lbs or less. A truck or van (including a SUV or minivan) has, until now, been treated as a passenger automobile if it has a gross vehicle weight of 6,000 lbs or less.
The limitations
Under our tax rules, tax deductions permit many PMPs to fully recover the cost of a basic automobile used in the business within a five-year period. In reality, few can really recover its cost within that period. It is only recently that the IRS recognized that these vehicles generally cost more than passenger cars, while still subject to the same “luxury car” depreciation limits.
Unfortunately; the IRS does not have the authority to simply raise the limits for deductions on van and light truck costs, a raise that would reflect their higher cost. The agency did, however, issue inflation-adjusted dollar limits for vehicles placed in service in 2003, reflecting a higher rate of price inflation for vans and light trucks.
This action, when combined with the increases in the first-year depreciation limits for all new passenger automobiles (including vans and light trucks) under the recent tax cut bills, will provide some relief. For example, if you choose the 50% additional first-year depreciation permitted under the Jobs and Growth Tax Reconciliation Act of 2003, you can recover the full cost of a new automobile costing nearly $23,000 over the five-year recovery period.
The IRS and the Treasury have now concluded that a limited exclusion from the luxury tax definition of passenger automobiles might be warranted for light trucks or vans unsuitable for personal use. Their exclusion is, according to their news release, “based on objective factors and does not provide an incentive to purchase a truck or van when a less-expensive automobile would be sufficient to fulfill a business need.”
Necessity, not luxury
There have always been exceptions to these general “luxury car” rules. Recently, the IRS and the Treasury issued regulations that exclude some trucks and vans from the definition of passenger automobile. Remember, however, it wasn’t until 2003 that the IRS and the Treasury recognized the difference between a “luxury car” and a van or light truck used for business purposes.
It’s not a perfect solution, but the new rules do exclude from the definition of passenger automobile any truck or van that qualifies as a so-called “nonpersonal use vehicle.” Qualified nonpersonal use vehicles include some basic trucks and vans.
The tax rules define a “qualified non personal use vehicle” as any vehicle that by design is not likely to be used more than a minimal amount for personal purposes. Their list includes:
* Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 lbs;
* Bucket trucks, such as “cherry pickers”;
* Cement mixers;
* Cranes and derricks;
* Delivery trucks with seating for only the driver (or for only the driver plus a folding jump seat);
* Dump trucks;
* Flatbed trucks; and
* Some moving vans.
Also exempted from the label is any pickup truck or van that has been specially modified in a manner that it, too, is unlikely to be used more than for personal purposes. This is where the average PMP vehicle comes in: For example, a van that has only a front bench for seating and permanent shelving installed in the cargo area, that constantly carries equipment and has been specially painted with advertising and the company’s name, is considered to be a vehicle not likely to be used more than a minimal amount for personal purposes.
According to the IRS, these specially manufactured or modified vehicles do not provide significant elements of personal benefit. In other words, since few PMPs are likely to purchase these vehicles unless motivated by a valid business purpose that could not be met with a less expensive vehicle, the IRS can safely exclude them from the luxury car definition.
Retroactive rules
These new regulations are retroactive and apply to vehicles placed in service on or after July 7, 2003. In fact, the IRS has amended the effective date provision to allow the exclusion for qualified, nonpersonal use vehicles that were placed in service prior to July 7, 2003–but on or after January 1, 2003.
Those amendments permit you to either amend previously filed tax returns for open tax years or to treat the change as a change in method of accounting by filing Form 3115, Ap plication for Change In Accounting Method.
Only in the eyes of our lawmakers could some of the vans and light trucks used in many pest control businesses be considered suitable for personal use or as a luxury vehicle. Now, the IRS has not only acknowledged that deduction caps have long prevented many PMPs from recovering the flail cost of vans and light trucks, it has created new ground rules to correct that inequality.
online
For the latest information on tax breaks for business, visit www.irs.gov/businesses. Talk to your accountant about your specific tax requirements.
Mark Battersby is an Ardmore, PA-based writer. Contact him at pccontributor@advanstar.com.
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