Imagine this – a husband and wife own a sales company and they purchase two passenger automobiles to be used in the course of business. The automobiles are available for personal use, but the husband and wife claim that they are primarily used to transport and entertain clients that are in town. While this fact pattern points to a valid business deduction for the automobiles, the IRS disagreed. This was part of a larger case that went to US Tax Court (Brent Mcminn and Lynette Mcminn v. Commissioner), which disallowed the deduction on the grounds that the automobiles were listed property and business use could not be substantiated.
The listed property rules under §280F impose depreciation limitations on certain types of assets, notably those that have business and personal uses. While multiple assets fall under the listed property rules, passenger automobiles are the most scrutinized. This includes vehicles that are purchased by a business or by an individual to be used in their course of employment. The IRS has established guidelines for determining if a passenger automobile is listed property and whether a deduction is allowed.
A deduction is allowed for listed property automobiles if:
The automobile is a passenger automobile
- Four-wheeled vehicle primarily used on public roads
- Unloaded gross vehicle weight of 6,000 pounds or less
- Does not include a vehicle directly used in the trade or business of transporting persons or property for compensation or hire
The automobile is “predominantly” used for business purposes
- The IRS states that this is more than 50% of the asset’s use after it is placed in service
- This does not translate to the time of year that it is placed in service
- An individual can purchase an automobile on January 1 or December 1 and the test will still apply
Assuming these guidelines are met, the allowable depreciation is limited based on the type of automobile that was placed into service. Take into consideration that:
- The table assumes that the automobile is placed into service prior to 2017 year-end
- The annual depreciation is the maximum amount allowed in the year
- The Year 1 amount includes §179 depreciation
- There is also the option to take bonus depreciation in Year 1, assuming the vehicle is brand new
- Bonus depreciation in this instance is limited to $8,000 rather than 50% of the vehicle’s cost basis
|Passenger Automobile Weighing <6,000 Pounds||Trucks, Vans, SUVs Weighing <6,000 Pounds|
|Year 1: 2017||$3,160||$3,560|
|Bonus Dep. in Year 1 (if purchased new)||8,000||8,000|
|Year 2: 2018||5,100||5,700|
|Year 3: 2019||3,050||3,350|
|Year 4 and after: 2020-||1,875||2,075|
Trucks, vans, and SUVs that have an unloaded gross vehicle weight greater than 6,000 pounds are not subject to depreciation limitations because they are not considered passenger automobiles under the listed property rules. However, §179 depreciation is limited to $25,000 in the case of:
- Passenger vans that do not seat more than nine people behind the driver
- Trucks with an interior bed length of less than six feet
It is important to understand the depreciation limitations for the vehicle that is placed in service. Keeping track of business usage is crucial in claiming depreciation and other vehicle expense deductions. In the case of Brent Mcminn and Lynette Mcminn v. Commissioner, the taxpayers were not able to provide evidence that the vehicles were predominately used in the course of business. Keeping a mileage log, including dates, distance traveled, and purpose of the trip will help show predominant business use for vehicles, including listed property.
To learn more about listed property, reference IRS Publication 946 chapter 5 or contact a member of DKB’s tax team today.