Section 8 - Tax Depreciation of Vehicles

Question 1

If a used SUV, pickup, or van is purchased, what is the Year 1 IRS 2016 limit?

Answer 1

$3,560

Question 2

When a sole proprietor drives a car for both personal and business use, the IRS auto limits are also reduced by personal use.

True or False

Answer 2

True.

Question 3

Depending on which category a vehicle falls into, there might be restrictions on the maximum amount of depreciation recognized for the year or dollar limit to the Section 179 deduction expense.

True or False

Answer 3

True.

Each category is subject to different rules and restrictions, however, as deemed by the IRS for depreciation purposes, all vehicles are considered 5-year property.

Question 4

Explain how the IRS classifies other vehicles (specially modified)

Answer 4

Other vehicles are those that do not fit into the first two categories of passenger auto or heavy SUV.

Other vehicles include the following:

• Specially modified vehicles. “Specially modified has a specific meaning under tax law. In IRS terms, that means a vehicle has been altered in a manner that makes it unlikely it would be driven for personal use. For example, a van with all seats removed, except for the driver and passenger, will more than likely be used for cargo purposes.
• Other vehicles also include those that weigh more than 14,000 pounds such as tractor-trailers and construction vehicles.
• Larger delivery trucks, hearses, taxis that are used in the trade or business of transporting people for hire, as well as delivery vehicles, used in the trade or business of transporting property for pay or hire and trucks not designed to carry passengers also fall into this category.

Question 5

What is the limit for other vehicles, if any?

Answer 5

Other vehicles are not subject to limitations for Sec. 179 expenses; there is also no limit for annual depreciation.

Question 6

If a new car is purchased, what is the Year 1 IRS 2016 limit?

Answer 6

$11,160

Question 7

A sole proprietorship (an unincorporated company with one owner) is allowed to depreciate a vehicle as though it were used 100% for business, even when employees drive company vehicles for personal use under the same conditions as stipulated for corporations.

True or False

Answer 7

True.

1. The employer has a business reason for providing the vehicle, such as business travel, or the vehicle is included as part of the employee’s compensation as a perk for the job
2. The employer reports the value of the employee’s personal use as taxable income on the employee’s W2

Question 8

How is a sole proprietor allowed to treat a car that is used for both business and personal use by an employee?

Answer 8

Similar to corporations, sole proprietors that allow employees to use company vehicles for both business and personal use are allowed to deduct 100% of the cost basis, provided that each employee’s personal use of the vehicle is reported as taxable income on the employee’s W2.

If the employer does not report the personal value as taxable income, they can only depreciate the cars cost basis in proportion to the employee’s business use.

Question 9

Explain the limitation for each:

Passenger auto

Heavy SUVs, pickups, and vans

Other vehicles (specially modified)

Answer 9

• All passenger autos are subject to annual IRS limits for combined bonus and tax depreciation. Therefore, each year, the company must compare the IRS limit to the depreciation expense calculated by the company (sum of bonus depreciation if a new vehicle and regular depreciation (cost basis x rate from Publication 946 table 1). Please note, Sec. 179 is not used for passenger vehicles.
• Different from passenger autos, heavy SUVs, pickups, and vans are allowed to recognize Sec. 179 of up to $25,000. Although there is a limit on Sec, 179, there is no limit on annual depreciation.
• Other vehicles are not subject to limitations for Sec. 179 expenses; there is also no limit for annual depreciation.

Question 10

How is an S-corporation allowed to treat vehicles used for both business and personal use by employees?

Answer 10

The company can deduct 100% of the cost basis, provided that each employee’s personal use of the vehicle is reported as taxable income on the employee’s W2. Some shareholder-owners may be subject to special rules.

If the employer does not report the personal value as taxable income, they can only depreciate the cars cost basis in proportion to the employee’s business use.

Question 11

Yanna Co provides a passenger auto to its employee Erica who periodically submits detailed records of business and personal mileage. For the year, Erica drove the car 80% for business and 20% for personal use. If Yanna Co did not include the value of the 20% personal use in Erica’s taxable income as reflected on the W-2, the company can depreciate the car as though

Answer 11

Yanna C0 can only depreciate 80% since the car was used 20% for personal use and the value was not reported as taxable income on Erica’s W-2.

Question 12

What is the limit for heavy SUV’s, pickups, and vans if any?

Answer 12

Different from passenger autos, heavy SUVs, pickups, and vans are allowed to recognize Sec. 179 expense up to $25,000. Although there is a limit on Sec, 179, there is no limit on annual depreciation.

Question 13

If a sole proprietor uses a company car for both personal and business usage, how is it handled for tax purposes?

Answer 13

Since sole proprietors do not file a W2 for themselves, any personal use of the car is not depreciable since it cannot be considered taxable income. Although a sole proprietor can’t depreciate 100% if they use the car for personal use, they are allowed to depreciate the vehicle’s cost basis in proportion to their business use.

For example, a sole proprietor who drives his or her vehicle 75% for business purposes can only depreciate 75% of the vehicles cost basis for tax purposes.

Question 14

If a new SUV, pickup, or van is purchased, what is the Year 1 IRS 2016 limit?

Answer 14

$11,560

Question 15

For heavy SUVs, pickups, and vans purchased after October 22, 2008, the Sec. 179 deduction is allowed but limited to _______.

Answer 15

$25,000

Question 16

A company must use the IRS limits for the year in which the car was purchased.

True or False

Answer 16

True

The IRS publishes this table for companies every year, adjusting for inflation; however, a company must use the IRS limits for the year in which the car was purchased.

Question 17

For tax depreciation purposes, vehicles fall into one of _______ general category types.

Answer 17

Three.

1. Passenger autos (less than 6k lbs)
2. Heavy SUVs and pickup trucks (6k lbs - 14klbs)
3. Other modified (14klbs+ or specially modified)

Question 18

What are the steps for depreciating a new car?

Answer 18

1. In year 1, calculate bonus depreciation
2. Subtract bonus depreciation from cost to get new cost basis that will be depreciated over the life of the car
3. Locate the depreciation rate for the year using the IRS Publication 946 5-year table
4. Multiply the new cost basis by the rate from the Table.
5. (Year 1 only) Add bonus depreciation plus regular depreciation to find total annual depreciation
6. Compare computed depreciation (bonus and regular depreciation in Year 1) to the IRS limit. After the first year, depreciation is found by multiplying the new cost basis by the rate in Table 1 and comparing the computed depreciation to the IRS limit. The lower of the two amounts must be used.

Question 19

Explain how the IRS classifies Passenger automobiles.

Answer 19

Passenger automobiles. Under tax law, a passenger auto is any four-wheel vehicle used for driving on public streets, roads, or highways and weighs 6,000 pounds or less of unloaded gross vehicle weight. This includes most cars and light (up to 6,000 pounds) trucks, SUVs or vans not ‘specially modified.’ All passenger autos are subject to annual IRS limits for combined bonus and tax depreciation. Therefore, each year, the company must compare the IRS limit to the depreciation expense calculated by the company (sum of bonus depreciation if a new vehicle and regular depreciation (cost basis x rate from Publication 946 table 1). Please note, Sec. 179 is not used for passenger vehicles.

Question 20

Why is Sec. 179 rarely used for passenger autos?

Answer 20

Under IRS Year 1 passenger auto limits - $11,160 for a new car and $11,560 for a new light SUV, pickup, or van, and far lower for used vehicles. For that reason, there is no point in wasting any part of the $500,000 Sec. 179 deduction, because it would more than likely exceed the deduction allowed.

Question 21

What are the steps for depreciating a used car?

Answer 21

1. Locate the depreciation rate for the year using the IRS Publication 946 5-year table
2. Multiply the cost basis by the rate from the Table.
3. Compare computed depreciation to the IRS limit. The lower of the two amounts must be used.

Question 22

What is the limit for passenger autos, if any?

Answer 22

All passenger autos are subject to annual IRS limits for combined bonus and tax depreciation. Therefore, each year, the company must compare the IRS limit to the depreciation expense calculated by the company (sum of bonus depreciation if a new vehicle and regular depreciation (cost basis x rate from Publication 946 table 1). Please note, Sec. 179 is not used for passenger vehicles.

IRS Year 1 passenger auto limits are as follows:

$11,160 for a new car and $11,560 for a new light SUV, pickup or van.

$3,160 for a used car, $3,560 for a used light SUV, pickup or van.

Question 23

A company can treat a vehicle as though it were used 100% for business even when employees drive a company vehicle for personal use but only if:

Answer 23

1. The employer has a business reason for providing the vehicle, such as business travel, or it is included as part of the employee’s compensation as a perk for the job
2. The employer reports the value of the employee’s personal use as taxable income on the employee’s W2

Question 24

If a used car is purchased, what is the Year 1 IRS 2016 limit?

Answer 24

$3,160

Question 25

A sole proprietor can depreciation 100% of a vehicle’s cost basis, even if the car is used for personal matters.

True or False

Answer 25

False.

Since sole proprietors do not file a W2 for themselves, any personal use of the car is not depreciable since it cannot be considered taxable income. Although a sole proprietor can’t depreciate 100% if they use the car for personal use, they are allowed to depreciate the vehicle’s cost basis in proportion to their business use.

For example, a sole proprietor who drives his or her vehicle 80% for business purposes can only depreciate 80% of the vehicles cost basis for tax purposes.

Question 26

Vehicles that fall into the ‘heavy SUVs, pickups, and vans’ category weigh

Answer 26

6,000 - 14,000 pounds

Question 27

Perry Co provides a passenger auto to its employee Mack who periodically submits detailed records of business and personal mileage. For the year, Mack drove the car 75% for business and 25% for personal use. If Perry Co includes the value of the 25% personal use in Mack’s taxable income as reflected on the W-2, the company can depreciate the car as though

Answer 27

If Perry Co includes the value of the 25% personal use in Aiden’s taxable income as reflected on the W-2, the company can depreciate the car as though it were used 100% for business.

Question 28

Vehicles that fall into the ‘other vehicles’ category weigh

Answer 28

14,000 pounds or more.

Question 29

What are the three category types for vehicles under the IRS rules?

Answer 29

• Passenger automobiles. Under tax law, a passenger auto is any four-wheel vehicle made primarily for use on public streets, roads, or highways and weighs 6,000 pounds or less of unloaded gross vehicle weight. This includes most cars and light up to 6,000 puns, SUVs or vans not ‘specially modified’. All passenger autos are subject to annual IRS limits for combined Section 179 expensing and tax depreciation.
• Heavy SUVs, pickups, and vans. These are vehicles that weigh more than 6,000 pounds, but less than 14,000 pounds. All vehicles that fall into this category are limited to $25,000 for Sec, 179 expenses, however, there is no limit on annual depreciation.
• Other vehicles. These are vehicles that do not fit in the first two categories. Other vehicles have no limits on Sec. 179 expensing or annual depreciation. Other vehicles include the following:
• Specially modified vehicles. “Specially modified has a specific meaning under tax law. In IRS terms, that means a vehicle has been modified in a manner that makes it unlikely for it to be driven for personal use. For example, if a van is modified to only have seating for the driver and one passenger, it is likely that the van will be used for cargo purposes.

Vehicles weighing at least 14,000 pounds. For example, tractor-trailers and construction vehicles Examples include larger delivery trucks, hearses, taxis that are used in the trade or business of transporting people for hire, as well as delivery vehicles, used in the trade or business of transporting property for pay or hire and trucks not designed to carry passengers.

Question 30

How is a C-corporation allowed to treat a vehicle used for both business and personal use by an employee?

Answer 30

The company can deduct 100% of the cost basis, provided that each employee’s personal use of the vehicle is reported as taxable income on the employee’s W2. Some shareholder-owners may be subject to special rules.

If the employer does not report the personal value as taxable income, they can only depreciate the cars cost basis in proportion to the employee’s business use.

Question 31

Vehicles that fall into the ‘passenger auto’ category weigh

Answer 31

6,000 pounds or less

Question 33

Explain how the IRS classifies heavy SUVs, pickups, and vans

Answer 33

Heavy SUVs, pickups, and vans. Vehicles that fall into this category are those that weigh between 6,000 to 14,000 pounds. Different from passenger autos, heavy SUVs, pickups, and vans are allowed to recognize Sec. 179 of up to $25,000. Although there is a limit on Sec, 179, there is no limit on annual depreciation.