Posted by: Barbara Theofilos, CPA
Many taxpayers use a business vehicle for personal uses. This is an acceptable practice, although it is important to understand the basic rules that apply to the deductibility of expenses related to the vehicle.
Taxpayers who use a vehicle more than 50% of the time for a qualified business use can deduct (1) the business use and investment use percentage of MACRS and bonus depreciation and the Section 179 deduction as well as (2) other ordinary and necessary vehicle expenses related to the qualifying use. The rules change for taxpayers who do not satisfy the more than 50% qualified business use test in the year the vehicle is acquired. Depreciation is calculated on the straight line method over a 5 year period for vehicles that are used less than 50% for business use. The Section 179 deduction and bonus depreciation are also disallowed for these vehicles.
The above rules are subject to the limitations on luxury vehicles. Certain trucks, vans and sport utility vehicles with a gross loaded vehicle weight rating exceeding 6,000 pounds are not subject to the luxury automobile depreciation limits. Vehicles weighing 6,000 pounds or less that are considered passenger autos are subject to the limits.
Qualified business use refers to the use of the vehicle in the trade or business. When attempting to satisfy the more than 50% business test, investment activity or other activity conducted for the production of income is not included. However, total business and investment use is considered for determining the percent of the total allowable depreciation that can be claimed on the vehicle.
If the qualified business use percentage is greater than 50% in the first year, but later drops below 50% then the excess depreciation must be recaptured. Excess depreciation is the Section 179 and other depreciation deductions allowed in years that the vehicle’s business use exceeded 50% over the depreciation that would have been allowed in those years using straight line depreciation over five years.
The rules and guidelines related to the personal use of business autos can be confusing. Please contact a Zinner professional to discuss your options.