Paul L. Caron

Saturday, May 14, 2011

New Tax Breaks for the Business Use of a Car

Weekend Wall Street Journal, The New Tax Breaks for Business Autos, by Laura Saunders:

Are you buying a new car for business? Uncle Sam has tax deals for you. This year, there's an even bigger break than in the past for buying a behemoth gas-guzzler. If you're buying a smaller car, there's a new reason to buy one costing more than $31,000 instead of less. There's also a new nudge for leasing over buying.

That's the upshot of recent guidance from the IRS concerning two changes in the law Congress made last year. The rules apply to cars bought after Sept. 8, 2010, and before Jan. 1, 2012. ... Here's a quick review of rules old and new.

• What's deductible. Unless a car is used 100% for business, expenses aren't fully deductible. Taxpayers must figure the percentage of business versus personal use and apply the business percentage to total expenses to arrive at the deduction. ...

• Other deductions. Unreimbursed tolls and parking fees are deductible as a miscellaneous expense (by employees) or on Schedule C (by the self-employed), as long as they aren't for commuting.

• How to figure the deduction. Taxpayers usually have a choice: Either deduct a flat 51 cents per business mile (in 2011), or write off IRS-approved depreciation plus actual costs for gas, maintenance and insurance, among other things. ... Using the flat allowance might make sense for a hybrid owner who uses little gas, while actual costs often work best for those with less-efficient cars.

• Depreciation deductions. ... The bottom line: This year Congress is running a large "bonus depreciation" special on cars weighing more than 6,000 pounds, such as the Cadillac Escalade and Nissan Armada. Taxpayers may deduct 100% of the car's cost in the first year—subject to the personal use disallowance, of course. Even better: If this deduction creates a loss, it may be used against other wages or carried back to generate a refund. ... Depreciation is far less generous for cars weighing less than 6,000 pounds. Cars costing more than $15,300 get first-year depreciation of $11,060 this year, but those costing more than $30,625 get more in years two through six than those costing less. ...

• Buy or lease? ... [E]xperts say to look hard at leasing if you want an expensive car weighing less than 6,000 pounds and plan to replace it every two years or so.

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