The end of 2013 means auto dealers and consumers may see the end of several tax incentives, perhaps none more significant than the current increased depreciation deductions allowed for large commercial vehicles.
There always has been a depreciation allowance for vehicles purchased to be used for commercial or business purposes. Generally, these federal income tax depreciation allowances were applied to upscale passenger vehicles used for business, and such deductions became known as “luxury auto depreciation limitations.”
Under the original statutes, the first-year depreciation limit is about $3,200 and the second year is about $5,000. The numbers decrease as the years go by.
These so-called luxury limitations apply only to passenger vehicles. When the model in question is over a certain weight class, and is not classified as a passenger vehicle, different rules apply. However, the considerably more significant tax breaks for buyers of larger commercial vehicles, such as heavy-duty pickups and SUVs, were set to expire Dec. 31.
For a single qualifying vehicle in the price range of $50,000-$100,000 that was purchased before the deadline, buyers could deduct up to 70%-80% of the cost for tax-year 2013. For the same vehicle acquired in 2014, the deduction could drop to as little as 40%.
With multiple vehicles, the difference becomes even greater. The percentage deduction in 2013 remained the same, while the deduction for even two heavy-duty vehicles acquired in 2014 could drop from as little as 40% to as low as 20%. The reduction increases as more vehicles are acquired.
In addition, buying a heavy SUV or truck used more than 50% for business before Jan. 1, 2014, still qualified for these expiring Section 179 depreciation benefits:
- The $25,000 heavy SUV deduction for both new and used vehicles.
- The 50% first-year bonus depreciation break for new vehicles purchased in calendar- 2013.
- Accelerated MACRS (Modified Accelerated Cost Recovery System) depreciation over five years for the balance of the vehicle's depreciable basis for both new and used autos.
New highway-capable battery-powered plug-in vehicles and plug-in hybrids purchased or leased in 2013 qualified for 2013 tax credits up to $7,500, based on their battery capacity. This credit also was set to expire at year’s end. Should it be extended, it does have a lifetime cap of 200,000 qualifying vehicles sold per manufacturer. Among qualifying vehicles are the Ford Focus Electric, Nissan Leaf and Chevrolet Volt.
And finally, yet another expiring tax incentive that could have implications for the auto industry is the research and experimentation tax credit.
Designed to stimulate innovation and American competitiveness and create jobs, the R&E tax credit has done its job for Detroit. During the first budget hearings last April, William Smith of American Axle & Manufacturing pleaded with the budget subcommittee to make the R&E incentives permanent “to allow U.S. automakers and suppliers to adequately plan for the future.”
Will these expiring tax incentives extend into 2014? In years past, particularly these kinds of industry-friendly tax breaks temporarily have disappeared, only to return a few months into the next fiscal year.
Most likely the extenders will see the light of day again at some point this year. But consumers and the industry will have to await full details of the recently approved budget proposal to see if these incentives will continue.
Ira Silver, CPA, is the principal-in-charge of the Orlando office of Morrison, Brown, Argiz & Farra, one of the top 40 accounting firms in the country. For more information, visit www.mbafcpa.com.
