March car sales were up 13 percent, the best showing since 2008. Reasons for the jump include replacing aging vehicles, taking advantage of cheap financing, and seeking more fuel efficient models. If you’re in the market for a new company car, truck or van, keep these five factors in mind.
1. Write-offs for buying a new vehicle are limited
You can deduct the cost of business use of the vehicle using an IRS standard mileage rate (55.5 cents per mile in 2012) or the actual costs. If you choose to write-off actual costs, you can take depreciation. However, the tax law restricts your depreciation write-off to a set dollar limit. For 2012, the limit (which is higher than it was in 2011) is only $11,160 if the vehicle is new, or $3,160 if the vehicle is pre-owned.
Once you use the actual expense method for deducting car expenses, you continue to do so for the life of the vehicle. Different dollar limits apply for years two and beyond.
2. A higher write-off is allowed for a heavy SUV
If you buy a heavy SUV in 2012—one that weighs more than 6,000 pounds—your depreciation limit for this year is $25,000. Heavy SUVs include the Cadillac Escalade, the Lincoln Navigator, and the Ford Expedition. Check with the dealer to determine a vehicle’s weight.
3. Trade-ins lower write-offs
If you trade in your old business car or truck for a new one, your depreciation for the new vehicle will be limited. This is because the basis of the new vehicle will be the adjusted basis of the old one (the vehicle’s cost minus depreciation), increased by any cash you paid (out of pocket or through financing).
If you sell the old vehicle rather than trade it in, you may have a gain. This is because depreciation lowered the tax basis of the vehicle. For example, say you originally paid $25,000 for a vehicle; it’s now worth $12,000. If you claimed depreciation totaling $20,000, the vehicle’s tax basis is now $5,000, so the sale would generate a gain of $7,000 ($12,000 - $5,000).
4. Leasing has tax advantages
Leasing is a way for you to afford to drive a more expensive vehicle, and there are also tax advantages to this arrangement. If you don’t use the standard mileage rate, you can deduct the full amount of the monthly lease payment if you use the vehicle 100 percent for business, along with other costs to operate the vehicle (e.g., gas and oil). If there is only partial business use, you’ll have to allocate the deductible portion of the lease payments.
If the vehicle’s sticker price is higher than $18,500, you’ll have to add back to your income a modest “inclusion amount” each year. This figure, taken from an IRS table, is meant to help equate the write-off for leasing versus owning the vehicle. The good news: The inclusion amounts for vehicles first leased in 2012 are lower than in previous years. For example, if you lease a car that would otherwise cost $61,000, the inclusion amount for 2012 is only $26; such a car first leased in 2011 would have had an inclusion amount of $46. Different inclusion amounts apply to leased vans and light trucks.
5. There’s a tax credit for buying an electric car
If you buy a Chevy Volt or other electric car in 2012, you can take a tax credit of $7,500. The credit reduces your taxes dollar for dollar.
Don’t look for any federal tax credit for buying a hybrid vehicle. This credit expired at the end of 2010. However, you may be eligible for tax credits or other breaks from your state for buying certain vehicles. Check DSIRE.org for your state’s tax rules.
To factor the tax savings when buying or leasing a company vehicle, work with your tax advisor to run the numbers for your situation.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.
Photo credit: Thinkstock