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The Question:
	What are the exceptions to the cap on depreciation write-off's?
Objectives
	Learn to find the exceptions and maximize the tax deductions!
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The Answer

Major Heading Links

Safety Issues

Weight chart - Suburban or Expedition

Explanation

Citation of the law

Regarding – Depreciation on Vehicles

Federal Income tax 2001

Under current law, depreciation write-off’s are restricted for “small” trucks and vans with empty (or loaded depending upon the law or the regulation) gross vehicle weight ratings of 6,000 pounds or less. Depreciation on those vehicles cannot exceed $7,660 in the first year, $4,900 the second year, $2,950 the next year and $1,775 per year afterwards.

Internal Revenue Service is now considering changing the rules on some types of these vehicles. The Internal Revenue Service plans to issue guidance on this topic within the next 12 months. Early indications are for 100% business use vehicles up to $24,000 of the cost of light trucks and vans with limited opportunities for personal use such as cargo and delivery vans that only seat a driver and one passenger to qualify for the initial increased expense.

Bob Parrish - 8/6/2002

How the limits are applied to vehicles larger than the typical passenger car

Cars and trucks that may be excluded from depreciation limits

Explanation

The law provides for a maximum (limit) for the deduction of depreciation. This restrictive limit applies to all methods of transportation with exceptions enumerated in the law. One of the exceptions is based upon the empty weight of the vehicle. Unloaded weight is stressed.

If You Have Taken the

First Year Write-Off

1.	If you purchased a vehicle which qualifies under the Regulation, but NOT under the Law - the IRS might challenge your tax deduction.
2.	The IRS has three years to make its challenge - do not expect any immediate challenge
3.	The amount of the tax, interest and penalties can be devastating.
Be certain to discuss this potential trap with Bob Parrish CPA, P.C.

WARNING

There are many citations of the tax law. Two are discussed in this warning:

The Tax LAW - as passed by Congress and signed by the President
Regulations - written by IRS personnel

For the issue of using empty weight or total weight including the payload there are two different definitions:

The definition in the LAW
The definition in the REGULATIONS

For the definition which is in the LAW one should refer to §280F(d)(5)

For the definition which in the regulations one should refer to §145.4051-1(e)

The law requires the owner of the vehicle to use the UNLOADED weight (GVW) while the regulations allow the vehicle owner to use the LOADED weight.

Along with this is yet another caveat:

The Regulation defines the method to use for determining the weight - however that Regulation applies to "IMPOSITION OF TAX ON HEAVY TRUCKS AND TRAILERS SOLD AT RETAIL".

This is not the same as the GVWR which is the number usually shown on the body of the vehicle. The law specifically uses the gross vehicle weight, that is the weight of the empty vehicle (excluding passengers, excluding the payload, or any other items not a part of the vehicle). What can confuse the issue further is the fact that not all vehicles have the same weight, even when comparing the model you purchase to a model a friend purchases. Options will make a difference in the GVW. Engine options, cab options, and other factors will all add to or subtract from the empty weight of the vehicle. Read GVW, GVWR and Payload

Please refer to the sample vehicle specification table included on this page. You will discover there will be a range of vehicle weights for the same model. That range will usually be a variance large enough that will include those weights which do not and those weights which do meet the qualifications. Suburban or Pickup

If the empty vehicle weighs more than 6,000 the annual depreciation limit does not apply.

The next section does not pertain to the tax rules, the tax rules continue below the next section.

Sport Utility Vehicle Safety Issues

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THE FOLLOWING WAS TAKEN FOR THE WEB SITE LINK BENEATH THIS LINE

http://www.howard.net/ban-suvs.htm

WARNING STICKERS

Manufacturers should be required to place an advisory sticker in each sport utility vehicle near the driver that reads:

"This is a multipurpose passenger vehicle which will handle and maneuver differently from an ordinary passenger car, in driving conditions which may occur on streets and highways and off road. As with other vehicles of this type, if you make sharp turns or abrupt maneuvers, the vehicle may roll over or may go out of control and crash. You should read driving guidelines and instructions in the Owner's Manual, and wear your seat belt at all times."

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SUV's are popular and our family owns an SUV at this time. When you refer to the above, do not misunderstand and think that I am an activist against the SUV. I am an advocate for you safety. Every vehicle has a center of gravity.

What is Center of Gravity ?

The higher the center of gravity on an object, the more unstable the object is. The object becomes "top heavy". If the motion should suddenly change directions, the instability becomes obvious. In addition, the suspension and tires are an important part of the stability. Combine soft ride with high center of gravity and you create a problem in vehicle stability.

The center of gravity of an object is the point you can suspend the object from without there being any rotation because of the force of gravity, no matter how the object is oriented. If you suspend an object from any point, let it go and allow it to come to rest, the center of gravity will lie along a vertical line that passes through the point of suspension. Unless you've been exceedingly careful in balancing the object, the center of gravity will generally lie below the suspension point.

The center of gravity is an important point to know, because when you're solving problems involving large objects, or unusually-shaped objects, the weight can be considered to act at the center of gravity. In other words, for many purposes you can assume that object is a point with all its weight concentrated at one point, the center of gravity.

Weight Chart

Typical Suburban or Expedition

Item	*Suburban*	Expedition
Base Price	$25,323-29,238	$30,510
Vehicle Type	front-engine, rear- or rear/4-wheel-drive; 5-door 5-9-passenger wagon	front-engine, rear or rear/4-wheel-drive; 5-door 5-9-passenger wagon
Interior Volume	F/M/R/cargo (cu ft)..........62/38/35/48	F/R/cargo (cu ft).........60/58/63
Wheelbase	131.5 in	119.0 in
Track F/R	62.6-68.6/63.1-63.9	65.4/65.5 in
Length/Width	219.5 in/76.7 in	204.6 in/78.6 in
*Height*	71.3-74.6 in	74.4-76.4 in
Curb Weight	4800-6600 lb	4900-5350 lb
*Fuel-tank capacity/EPA city mpg*	42.0 gal/13-15MPG	30.0 gal/14MPG
Standard passive restraint	driver and passenger airbags	driver and passenger airbags
POWERTRAIN	5.7-liter pushrod 16-valve V-8, 255 hp; turbocharged 6.5-liter pushrod 16-valve diesel V-8, 190 hp; 7.4-liter pushrod 16-valve V-8, 290 hp; 4-sp auto	4.6-liter SOHC 16-valve V-8, 215 hp; 5.4-liter SOHC 16-valve V-8, 230 hp; 4-sp auto
SUSPENSION	F: ind, unequal-length control arms, anti-roll bar; 2wd: coil springs, 4wd: torsion bars R: rigid axle, leaf springs, anti-roll bar (opt)	F: ind, unequal length control arms, anti-roll bar; 2wd: coil springs; 4wd: torsion bars R: rigid axle, coil springs, anti-roll bar,air springs optional
BRAKES	F/R..........vented disc/drum ABS..........standard	F/R.........vented disc/disc ABS.........standard

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Technical - citation of the specific law

SECTION 280F. LIMITATION ON DEPRECIATION FOR LUXURY AUTOMOBILES; LIMITATION WHERE CERTAIN PROPERTY USED FOR PERSONAL PURPOSES

(a) LIMITATION ON AMOUNT OF DEPRECIATION FOR LUXURY AUTOMOBILES

(1) DEPRECIATION

(A) LIMITATION

The amount of the depreciation deduction for any taxable year for any passenger automobile shall not exceed--

(i) $2,560 for the 1st taxable year in the recovery period,

(ii) $4,100 for the 2nd taxable year in the recovery period,

(iii) $2,450 for the 3rd taxable year in the recovery period, and

(iv) $1,475 for each succeeding taxable year in the recovery period.

(b) LIMITATION WHERE BUSINESS USE OF LISTED PROPERTY NOT GREATER THAN 50 PERCENT (Detail omitted)

(d) DEFINITIONS AND SPECIAL RULES: For purposes of this section--

(4) LISTED PROPERTY

(A) IN GENERAL: Except as provided in subparagraph (B), the term "listed property" means--

(i) any passenger automobile,

(ii) any other property used as a means of transportation,

(iii) any property of a type generally used for purposes of entertainment, recreation, or amusement,

(iv) any computer or peripheral equipment (as defined in section 168(i)(2)(B)),

(v) any cellular telephone (or other similar telecommunications equipment), and

(vi) any other property of a type specified by the Secretary by regulations.

(5) PASSENGER AUTOMOBILE

(A) IN GENERAL: Except as provided in subparagraph (B), the term "passenger automobile" means any 4-wheeled vehicle--

(i) which is manufactured primarily for use on public streets, roads, and highways, and

(ii) which is rated at 6,000 pounds unloaded gross vehicle weight or less.

In the case of a truck or van, clause (ii) shall be applied by substituting "gross vehicle weight" for "unloaded gross vehicle weight".

(B) EXCEPTION FOR CERTAIN VEHICLES

The term "passenger automobile" shall not include--

(i) any ambulance, hearse, or combination ambulance-hearse used by the taxpayer directly in a trade or business,

(ii) any vehicle used by the taxpayer directly in the trade or business of transporting persons or property for compensation or hire, and

(iii) under regulations, any truck or van.

Regulation Allowing the LOADED Weight

§145.4051-1(e)

(e) Definitions. For purposes of this section:

(1) Tractor.

(i) The term "tractor" means a highway vehicle primarily designed to tow a vehicle, such as a trailer or semitrailer, but does not carry cargo on the same chassis as the engine. A vehicle equipped with air brakes and/or towing package will be presumed to be primarily designed as a tractor.

(ii) An incomplete chassis cab shall be treated as a tractor if it is equipped with one or more of the following:

(A) A device for supplying pressure from the chassis cab to the brake system (air or hydraulic) of the towed vehicle;

(B) A mechanism for protecting the chassis cab brake system from the effects of a loss of pressure in the brake system of the towed vehicle;

(C) A control linking the brake system of the chassis to the brake system of the towed vehicle;

(D) A control in the cab for operating the towed vehicle's brakes independently of the chassis cab's brakes; or

(E) Any other equipment designed to make it suitable for use as a tractor. An incomplete chassis cab which is not equipped with any of the devices set forth in paragraphs (e)(1)(ii)(A) through (E) of this section shall be treated as a truck if the purchaser certifies in writing that the vehicle will not be equipped for use as a tractor.

(2) Truck. The term "truck" refers to a highway vehicle that is primarily designed to transport its load on the same chassis as the engine even if it is also equipped to tow a vehicle, such as a trailer or semitrailer.

(3) Gross vehicle weight.

(i) For purposes of this section the term "gross vehicle weight" means the maximum total weight of a loaded vehicle. Except as otherwise provided in paragraphs (e)(3)(ii) through (v) of this section, such maximum total weight shall be the gross vehicle weight rating of the article as specified by the manufacturer or established by the seller of the completed article, unless the Commissioner finds that such rating is unreasonable in light of the facts and circumstances in a particular case.

(ii) A seller must specify or establish a weight rating for each chassis, body, or vehicle sold on or after April 1, 1983 if such article requires no additional manufacture other than (A) the addition of readily attachable articles, such as tire or rim assemblies or minor accessories, (B) the performance of minor finishing operations, such as painting, or (C) in the case of a chassis, the addition of a body. If an article is specially equipped to the purchaser's specifications, such specifications may be used to establish the gross vehicle weight of the article.

(iii) A seller shall maintain a record of the gross vehicle weight rating of each truck, trailer and semitrailer sold and excluded from the tax imposed by section 4051(a)(1) by reason of sections 4051(a)(2), (3) and paragraphs (e)(3)(i) through (v) of this section. For this purpose, a record of the serial number of each such article shall be treated as a record of the gross vehicle weight rating of the article if such rating is indicated by the serial number.

(iv) If (A) the seller's rating indicated in a label or identifying device affixed to an article, (B) the rating set forth in the sales invoice or warranty agreement, and (C) the advertised rating for that article (or two or more identical articles) are inconsistent, the highest of such ratings will be considered to be the seller's gross vehicle weight rating specified or established for purposes of the tax imposed by section 4051(a)(1).

(v) The seller's gross vehicle weight rating must take into account, among other things, the strength of the chassis frame and the axle capacity and placement. The Commissioner may exclude from the gross vehicle weight rating any readily attachable parts to the extent the Commissioner finds that the use of such parts in computing the gross vehicle weight rating is unreasonable.

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Depreciation Calculations - If the Vehicle Qualifies for the Exception

Life: You may read one of the tables identifying the assets and the number of years to depreciate - get it. Since most of the vehicles qualifying for the exceptions will be an SUV or other truck, then the number of years will be 5, unless you have a truck tractor which is 3 years. Be cautious, the number of years to use can effect the method permitted.

Usually the number of years will be 5, but not always so - check the law, or ask for help.

Methods: Listed property that is predominantly used in a trade or business is eligible for the MACRS or Code Section 179 only to the extent it is so used and only for as long as it is so used. The alternative depreciation system using the straight-line method over the class life of the asset is required for listed property that is not used predominantly in a trade or business. If the vehicle qualifies for one of the excetions you may use one of the generally accepted methods of depreciation.

Usually the method can be either a declining balance method or straight line, but not always so - check the law, or ask for help.

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50% Business Use Requirement

If not used more than 50% Business Use:

You are required to use the straight line method of depreciation and you must add to your income the excess depreciation.

EXAMPLE. On June 25, 1995, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. The pickup truck had a gross vehicle weight of 7,000 pounds. She used it only in a qualified business use for 1995 through 1998. Because the pickup truck weighed over 6,000 pounds, it was not subject to the limits that apply to passenger automobiles as discussed later under SPECIAL RULES FOR PASSENGER AUTOMOBILES. Ellen claimed a section 179 deduction of $10,000 based on the purchase of the truck. She began depreciating it using 200% DB over a 5-year GDS recovery period. If, during 1999, she had used the truck 50% for business and 50% for personal purposes, she would include $4,018 excess depreciation in her gross income. The excess depreciation would be determined as follows.

Item	Amount	Amount
Total additional and ordinary depreciation		16,618
Depreciation allowable
1995 - 10% of $18,000	1,800
1996 - 20% of $18,000	3,600
1997 - 20% of $18,000	3,600
1998 - 20% of $18,000	3,600
Total allowable depreciation		12,600
EXCESS DEPRECIATION		4,018

If her use of the truck did not change to 50% for business and 50% for personal purposes until 2001, she would not have to include any excess depreciation in income. This is because there would be no excess depreciation. The total depreciation allowable through 2000 would be $18,000 which equals the total depreciation plus the section 179 deduction she claimed.

Glossary

Gross Vehicle Weight - AKA GVW; this is the weight of the vehicle empty. Options such as engines, transmission can change this number. Passengers, payload, trailers attached etc. do not change this number.

Gross Vehicle Weight Rating - AKA GVWR; this is the weight of the vehicle, the gasoline, oil, passengers, cargo, luggage, tools, or any other items which will be in or on the vehicle.

Payload - Payload is the GVWR less the GVW

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