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IRS Finally Issues 2003 Depreciation Limits for Luxury Cars
The IRS annually publishes the (1) limits on depreciation deductions for owners of passenger autos first placed in
service during the calendar year, (2) amount to be included in income by lessees of autos first leased during the
calendar year, and (3) maximum allowable FMV for an employer-provided auto first made available to employees for
personal use during 2003 to be eligible for the vehicle cents-per-mile valuation rule. The IRS finally issued these
limitations for 2003 in Rev. Proc. 2003-75, 2003-43 IRB.
Depreciation Limits on Luxury Cars
For a luxury auto placed in service in 2003, the taxpayer's depreciation deduction cannot exceed the depreciation
limit for that year. This continues until the taxpayer has fully recovered the cost of the luxury auto (or the auto is
disposed of), even if this takes longer than the normal five-year recovery period. Any depreciation deductions
disallowed by these rules are carried over to subsequent years [IRC Sec. 280F(a)(1)(B)]. Therefore, these rules act to
slow, rather than eliminate, depreciation deductions for luxury cars.
Depreciation limits are imposed on "luxury autos" under IRC Sec. 280F(a). A luxury auto is one costing more than the
luxury auto price floor, which was only $12,800 in 1984 and has been annually adjusted for inflation thereafter. For
qualifying vehicles purchased and placed in service after September 10, 2001, and before May 6, 2003, the first-year
limit is increased to reflect the then-available 30% bonus depreciation amount. For qualifying vehicles purchased and
placed in service after May 5, 2003, and before January 1, 2005, the first-year depreciation limit is increased to
reflect the 50% bonus depreciation deduction authorized by IRC Sec. 168(k).
Observation: Bonus depreciation is not available unless the vehicle is used more than 50% of the time for business.
All three limits are reduced to the extent the vehicle is not used 100% for business.
As already noted, each year, the IRS issues an updated table showing the depreciation limits for a luxury auto placed
in service that year. This year, Rev. Proc. 2003-75 provides separate limits for passenger autos, trucks and vans,
electric autos, and vehicles eligible for the 30% and 50% bonus deprecation deductions, as follows:
Passenger Autos
First year/regular
Trucks and Vans
Electric Autos
$ 3,060
$ 3,360
$ 9,080
First year/30% bonus depreciationa
7,660
7,960
22,880
b
10,710
11,010
32,030
Second year
4,900
5,400
14,600
Third year
2,950
3,250
8,750
Each succeeding year
(until cost is fully recovered)
1,775
1,975
5,225
First year/50% bonus depreciation
Notes:
a. Qualified property acquired and placed in service after September 10, 2001, and before May 6, 2003.
b. Qualified property acquired and placed in service after May 5, 2003, and before 2005.
Observation: The calculation of the price inflation amount for trucks and vans placed in service during 2003 uses a
different CPI automobile component (the "new trucks" component) than that used for passenger autos (the "new
cars" component), resulting in higher depreciation limits for trucks and vans. This change reflects the higher rate of
price inflation applicable to trucks and vans since 1988. For these purposes, the term trucks and vans refers to
passenger automobiles built on a truck chassis, including minivans and sport utility vehicles (SUVs) built on a truck
chassis.
For example, assume that Sam purchases a new car in March 2003 costing $23,000 for use in his sole proprietorship.
The car is used 90% for business and qualifies for the 30% bonus depreciation deduction. Sam uses a half-year
convention and the MACRS depreciation method. The car qualifies for the higher 30% bonus depreciation first-year
Section 280F limit. Depreciation for 2003 equals $6,894 ($7,660 × 90%).
Lease Income Inclusion Rule for Luxury Autos
When a taxpayer leases an auto and uses it in a trade or business, the business use percentage of the lease expense
can be deducted if the actual cost method for claiming auto expenses is used. But to achieve parity with the forgoing
depreciation limits, the IRS publishes lease "income inclusion" amounts that apply to luxury cars leased for 30 days or
more. The annual income inclusion amount is subtracted from the lessee's lease expense to determine the net
deduction for the year [IRC Sec. 280F(c)(2)]. The car owner's (lessor's) deductions are not affected by this
adjustment [IRC Sec. 280F(c)(1)].
The 2003 income inclusion amounts appear in Rev. Proc. 2003-75. Lessees of passenger autos other than trucks,
vans, and electric autos should use Table 10 of this revenue procedure, while lessees of trucks and vans should use
Table 11 and lessees of electric autos should use Table 12. Each table shows inclusion amounts for a range of FMVs
for the first tax year of the lease and for each tax year the auto is leased thereafter.
Note: The FMV of the leased auto is the amount that would be paid to buy the car in an arm's-length transaction. The
FMV for the lease income inclusion rules is the capitalized cost of the auto if that cost is specified in the lease
agreement [Temp. Reg. 1.280F-5T(h)(2)]. If the capitalized cost is not furnished in the lease, the lessee can refer to
a publication (such as the NADA book or the Kelly Blue Book) or a database that reports new or used car retail prices.
For example, assume that on January 17, 2003, Matt leased a car for three years and placed it in service in his sole
proprietorship. The car had a $33,500 FMV on the first day of the lease term. The car is used 75% for business. The
lease income inclusion for 2003 is $45 (table amount of $63 from Rev. Proc. 2003-75, prorated for 75% business use
and 348/365 days of the year). For 2004, the income inclusion will be based on a table amount of $138 multiplied by
the appropriate business use percentage.
While the annual income inclusion amount in the previous example appears minimal compared to the depreciation
limits on passenger cars, it actually represents a permanent difference (calculated to represent the time value of the
extra lease deduction), while the depreciation limits represent a timing difference that is eventually recovered through
depreciation deductions or upon the car's disposition.
Vehicle Cents-per-mile Valuation Rule
The vehicle cents-per-mile rule values the miles driven by an employee for personal purposes based on the business
standard mileage rate. To compute the value of personal use, the business standard mileage rate is multiplied by the
total number of miles the employee drove the vehicle for personal purposes. Unless additional services are provided
with the vehicle, the employer may not include in income a greater amount [Reg. 1.61-21(e)(4)]. This means the
employer cannot include in income 100% (all business and personal miles) of the value of the use of the vehicle.
The IRS periodically publishes an updated business standard mileage rate. Unless the IRS indicates otherwise, the
cents-per-mile rate should be applied prospectively from the first day of the tax year following the date of publication
of the applicable revenue ruling or procedure. Beginning January 1, 2003, the rate is 36 cents per mile.
In general, the vehicle cents-per-mile valuation rule cannot be used if the auto is a luxury auto on the first date made
available to an employee for personal use. A luxury auto is any auto whose depreciation deductions are limited under
IRC Sec. 280F(a)(1). For 2003, the inflation-adjusted value limitation is $15,200 per Rev. Proc. 2003-75.
Concluding Thought
For luxury auto depreciation limitation purposes, a passenger auto is any four-wheeled vehicle manufactured
primarily for use on public streets and rated at an unloaded gross vehicle weight of 6,000 pounds or less. For a truck
or van, the preceding 6,000 pound weight test is applied to the gross vehicle weight rather than its unloaded weight
[IRC Sec. 280F(d)(5)(A)]. Included in the definition of a truck or van are SUVs and minivans if built on a truck chassis
[Prop. Reg. 48.4001-1(b)(2)(iii)].
Based on this, use of one of the heavier SUVs (such as the GMC/Chevrolet Suburban, which is built on a truck
chassis) will avoid the Section 280F depreciation limits and arguably may qualify for the cents-per-mile valuation rule
(despite the fact the vehicle's value far exceeds the inflation-adjusted limitation) because the vehicle is not included
in the definition of a luxury auto due to its weight.
Another implication of escaping the passenger auto definition is that the Section 179 expensing rules apply. This
means up to $100,000 (for 2003) of the cost of a vehicle outside the definition of a passenger auto (e.g., some heavy
SUVs) can be deducted in the first year. The remaining depreciable basis, if any, can be recovered using the five-year
MACRS tables and, if applicable, first-year bonus depreciation. The Section 179 write-off can be a huge advantage,
even for vehicles purchased late in the year. However, if business usage is 50% or less, the Section 179 deduction is
unavailable [Reg. 1.179-1(d)].
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