AUTOMOTIVE

This is provided to assist clients in making informed financial decisions when buying, selling or leasing vehicles. Being knowledgeable before shopping can help save those hard-earned dollars. This page is organized in logical steps to help you prepare yourself.

(STEP #1) Determine Trade-in Values - Use this link to determine the trade-in value of your vehicle. The valuation will take into consideration the make, model, year, mileage, condition and vehicle amenities.

(STEP #2) Determine Affordability - Based on your down payment (if any), trade-in (if any), current interest rates, and the amount you can afford monthly, this loan payment calculator will determine what purchase price you can afford. With this information, proceed to the new or used car values to select a vehicle within your price range.

(STEP #3a) New Car Values - Use this link to determine the suggested resale price of a planned new car purchase.

(STEP #3b) Used Car Values - If you plan on purchasing a used vehicle, use this link to determine the estimated used car retail value. Caution: Used car values can vary significantly, based on the condition of the vehicle.

(STEP #4) See if any of the special considerations below apply to you.

Considering a Lease? If you are considering a lease rather than purchasing a vehicle, our calculator can assist you in evaluating whether it is better to lease or buy.

Financing the Vehicle? Please review our article on the deductibility of vehicle interest. 

Using the Vehicle for Business? Please review our article on luxury auto limits and how to avoid those limitations.  

Purchasing a Lean-Burn Technology Vehicle?  If so, you may qualify for a substantial tax credit.  

Purchasing a Hybrid Vehicle?  If so, you may qualify for a substantial tax credit. 

Congress has imposed tough rules that substantially limit the deduction for this charitable donation.

It is common practice for charities to immediately resell the donated vehicles to a wholesaler at substantially reduced prices, generally far less than the FMV one might consider as the listed bluebook FMV of the vehicle.  As a result and to keep taxpayers from deducting more than the charity benefited from donation, if the deduction exceeds $500, the deduction will be limited to the gross proceeds from the charity’s sale of the vehicle.

Example: A taxpayer donates a car with a FMV of $2,000 to a charity. The charity immediately sells the car to a wholesaler for $900. The taxpayer would only be able to deduct the gross proceeds from the charity’s sale. This limits the taxpayer’s charitable contribution deduction to $900.

In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor’s tax ID number and the vehicle identification number (or similar number) of the vehicle. The IRS has developed new Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane.

There is an exception to these rules for donated vehicles which the charity retains for their own use “to substantially further the organization's regularly conducted activities” or sells it at a price significantly below FMV (or gives it away) to a needy individual in direct furtherance of the charitable purpose of a donee of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. Please call this office for more information.

With all the recent changes in the tax laws and regulations, the options for deducting the business use of a vehicle are both numerous and generous. In fact, there are so many options that some can easily be overlooked. Note: When a vehicle is used both for personal and business use, the expenses must be prorated based on miles driven for each purpose.

Listed below are some of those options:

• Lease or Purchase – Your first option deals with the manner in which you acquire the vehicle. Whether you decide to lease the vehicle or purchase it, you may choose to deduct the business use of the vehicle using either the actual expense method or the standard cents-per-mile method. Note: If you choose the actual expense method the first year, then the standard cents-per-mile method cannot be used in any future year.
  
• Trade-In or Sell Old Vehicle – If you are replacing an existing vehicle, you have the option either to trade in the old vehicle or to sell it. Without considering other economic factors, if the sale of the old vehicle would result in a gain, then you may wish to consider trading it in and avoid the need of reporting the gain and instead reduce the cost basis of the replacement vehicle. On the other hand, if the sale will result in a loss, then it would probably be better to sell the vehicle and take the loss on your return.
  
• Cents-Per-Mile Method – This method requires the least amount of bookkeeping. You need only record the business miles and total miles driven on the vehicle each year, and the business deduction is the business miles multiplied by the rate for the year. Note: This method cannot be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously, such as in fleet operations.
  
• Actual Expense Method – As the name implies, this method involves deducting the actual expenses of operating the vehicle. This requires keeping track of the operating costs, including fuel, oil, maintenance, repairs and insurance. In addition, either the annual lease expense or, depending on the class of vehicle, an allowance for wear and tear on the vehicle is added to the annual expenses. A record of the business and total miles must also be maintained to determine the business portion of the expenses.
  
• Class of Vehicle – The class of vehicle affects the limitations that are applied to the allowances for wear and tear available for a particular vehicle.
  
  A. Vehicles With No Limitations: The following vehicles qualify for the Sec 179 deduction, regular depreciation and bonus depreciation. Depending on the methods selected, virtually any amount of the cost of this type of vehicle can be deducted in the year of purchase.
  
  -Heavy Vehicle – A vehicle exceeding 6,000 pounds gross unladen weight such as many of today’s sport-utility vehicles.
  
  -Qualifying Nonpersonal Use Vehicle – A vehicle that has been specially modified with the result that it is not likely to be used more than a de minimis amount for personal purposes.
  
  -Exempt Vehicles – A vehicle used directly in a taxpayer’s trade or business of transporting persons or property for compensation or hire, such as an ambulance, hearse, taxi, clean fuel vehicles, bus or commuter highway vehicles.
  
  B. Those With Limitations: The following vehicles are limited by the luxury auto rules:
  
  -Luxury Vehicle – Generally, a vehicle costing more than an annually inflation-adjusted threshold ($15,300 to $17,004) and not falling into one of the other previous categories. This threshold and the annual limits are not determined until late in the year.
  
  -Special Trucks & Vans – Defined as passenger autos that are built on a truck chassis, including minivans and sport-utility vehicles (SUVs). These vehicles are subject to the annual luxury vehicle limitations, but are allowed an additional $100 added on to those limitations.
  
  C. Vehicles with Other Limitations: In addition to those described above, there are certain other seldom encountered vehicles, such as electric vehicles and certified clean fuel vehicles, with other special allowances.
  
• Interest and Taxes – In addition to the other deductions discussed above, the business portion of personal property taxes, license and interest on the debt to purchase the vehicle are also deductible when the vehicle expenses are being deducted on a business schedule.

The Internal Revenue Service has acknowledged the certifications by manufacturers that certain advanced lean-burn technology vehicles qualify for the alternative motor vehicle tax credit.

Before, only hybrid vehicles, fuel cell vehicles and alternative fuel vehicles had been certified, but now certain advanced lean-burn technology vehicles, which generally run on diesel fuel have been certified.  These vehicles are passenger cars or light trucks with an internal combustion engine designed to operate primarily using more air than is necessary for complete combustion of the fuel.  The vehicles also must incorporate direct fuel injection technology and achieve at least 125 percent of the 2002 model year city fuel economy rating.

Available credit amounts may vary and include a base credit amount based on fuel economy compared to the 2002 model year city fuel economy rating and an additional amount based on the vehicle’s lifetime fuel savings.  For a taxpayer to claim the credit, the original use of the vehicle must begin with the taxpayer, and the vehicle must be acquired for use or lease by the taxpayer and not for resale.

There is a limitation on the number of qualified hybrid and advanced lean-burn technology vehicles eligible for credit.  The phase-out period begins when a manufacturer sells 60,000 qualified hybrid and advanced lean-burn technology vehicles.

Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid passenger automobile or light truck or advanced lean-burn technology motor vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit.  For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit.  No credit is allowed after the fifth quarter.

The qualifying vehicles and their credit amounts are:

When you use a vehicle for business purposes, you can deduct the business portion of the operating expenses on your business. If you use the car for both business and personal purposes, you may deduct only the cost of its business use. You can generally determine the expense for the business use of your car in one of two ways, the standard mileage rate method or the actual expense method.

Standard Mileage Rate Method: The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance and depreciation (or lease) expenses. The rate varies from year to year and for 2010, the standard mileage rate is 50.0 (down from 55.0 cents in 2009) cents per mile. In addition, the cost of business-related parking and tolls is deductible.

Caution: If you don’t use the standard mileage rate in the first year the vehicle is placed in service, you cannot use it in future years. If, in a subsequent year, you switch to the actual method, you must use the straight-line method for depreciation. If the car is leased, you must continue to use the standard mileage rate in future years.

Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible. Both methods can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions.  Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.”

The depreciation deduction for luxury vehicles has an annual limit which generally changes slightly for each tax year and is expected be $2,960 for 2010 (the same as 2009). For 2009, there was a special bonus depreciation allowable.  As a result, the maximum first year deduction of passenger vehicles, van and small trucks is increased by $8,000, thus providing a 2009 first-year limit of $10,960 ($11,060 for small trucks and vans).

In an effort to reign in the practice of purchasing SUVs as a tax shelter, Congress has placed limit of $25,000 on the §179 deduction for certain vehicles. The limit applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver’s seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

In addition to the Section 179 deduction for 2009, taxpayers can also apply the 50% bonus depreciation.  Combining the $25,000 Sec. 179 deduction with the new 50% bonus depreciation and the regular depreciation on the balance can provide a huge first-year write-off in 2009. The following is a representative example (assuming 100% business use):

If you are planning the buy an SUV based on this big write-off, be sure to call first to find out the status of the current legislation and how the tax benefits apply to your particular situation.

With gas prices going through the roof maybe now is the time to take advantage of the energy tax incentives available for the purchase of hybrid or lean burn technology vehicles.

If you purchase a hybrid vehicle in any year before 2011, you may qualify for a tax credit that is made up of two separate credits;

• The increased fuel economy credit, ranging from $400 to $2,400,
  and
• The lifetime fuel savings credit, ranging from $250 to $1,000.

Thus, you can receive tax credits up to $3,400 depending upon the vehicle’s efficiency. If the vehicle is purchased for personal use, the credit will reduce the regular tax to zero, but any excess credit is lost. For years prior to 2009, to the extent that the individual is subject to the alternative minimum tax (AMT), the credit provided no benefit at all. However, for 2009 the credit reduces both the Regular and AMT taxes but any excess is still lost.  If some portion of the vehicle is used for business, then the credit is allocated between the personal credit and a general business credit. Unlike the personal portion of the credit, any unused portion of the general business credit can be carried to other tax years.

The credits are reduced and phase out when a manufacturer's quota of 60,000 vehicles is exceeded (see explanation below).  Toyota (including Lexus), and Honda vehicles no longer qualify. Ford vehicles only qualify for a reduced credit through the first quarter of 2010.  The following are vehicles that still have credits available as of 10/1/09. 

Hybrid Credit Qualified (As of October 1, 2009)
Ford  Escape Hybrid 2 WD - 750
Ford  Escape Hybrid 4 WD - 585
Ford Fusion Hybrid - 1,020
Mercury Milan Hybrid - 1,020
Mercury Mariner Hybrid 4 WD - 585
Mercury Mariner Hybrid 2 WD - 900
Cadillac Escalade 2WD Hybrid - 2,200
Cadillac Escalade AWD Hybrid - 1,800
Chevrolet Silverado (2WD) Hybrid Pickup - 2,200
Chevrolet Silverado (4WD) Hybrid Pickup - 2,200
Chevrolet Tahoe Hybrid (2WD & 4WD) - 2,200
GMC Sierra (2WD) Hybrid Pickup - 2,200
GMC Sierra (4WD) Hybrid Pickup - 2,200
GMC Yukon Hybrid (2WD & 4WD) - 2,200
Saturn Vue Green Line - 1,550
Saturn Vue - 1,550
Saturn Aura Hybrid - 1,550
Malibu Hybrid - 1,550
Nissan Altima Hybrid - 2,350
Mazda Tribute 2WD Hybrid - 3,000
Mazda Tribute 4 WD Hybrid - 1,950
Chrysler Aspen Hybrid - 2,200
Dodge Durango Hybrid - 2,200

Lean Burn Technology Qualified - Click here to access the list of qualifying lean burn vehicles (as of February 2010).

Manufacturer Phase-Out - Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.

As you can see, it is not as simple as you might think and depending on your particular circumstances you might not benefit from the credit at all. Thus, before you sign on the dotted line, you need to:

(1) Verify the amount of credit available for the vehicle you are purchasing, and

(2) Make sure the credit is not limited because the manufacturer has exceeded the 60,000 car limit.

Additionally, you should evaluate whether the extra cost usually commanded for hybrid vehicles can be recouped by a combination of the tax benefit and anticipated fuel cost savings over the period you expect to operate the vehicle.

Standard Mileage Tax Strategy – If you use a vehicle for business, you have the option of deducting the actual expenses including fuel, repairs, insurance, etc., or deducting a standard amount for each business mile driven. The standard mileage rate is determined periodically by the IRS using average costs of operating a vehicle. With the increase in fuel costs, the IRS has set the business mileage rate for 2010 at 50.0 cents per mile (was 55.0 cents per mile in 2009). By using the standard mileage rate with a high fuel-efficient vehicle, it is conceivable that you could deduct more than the actual cost of operating the vehicle.

The answer to that question depends upon whether or not the vehicle is being used for business purposes, where the expenses are being deducted, and the type of loan. If the loan is a consumer loan secured by the vehicle, then the following rules would apply:

• If the vehicle is being used partially for business and the expenses are being deducted on your self-employed business schedule then the business portion of the interest will be deductible as business interest, but the personal portion will not. 
  
• If the vehicle is being used partially for business as an employee and the expenses are being deducted as an itemized deduction, then neither the business portion nor the personal portion of the interest will be deductible. 
  
• If the vehicle is entirely for personal use, then none of the interest will be deductible, because the only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest. 

As an alternative to a nondeductible consumer loan, you might consider acquiring that vehicle with a home equity line of credit. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to the purchase of a vehicle or motor home. Using a home equity line will make the interest deductible. 

Before borrowing against the home, you should consider the following:

• Treat the home equity loan like a consumer loan and pay it off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for.
  
• When buying a car, you can sometimes get very favorable interest rates or a rebate.To determine which is best, compare the difference in total loan payments over the life of the loans to the rebate amount.
  
• It is also good practice to make sure the benefit of making the interest deductible is greater by using the home equity line of credit than the benefit of the low interest consumer loan or the rebate. 
  
• If there is any chance of defaulting on the loan, the repercussions from defaulting on a home loan are far more serious than on consumer debt.

If you need assistance in deciding on a course of action, please call our office.

Unfortunately, if you deduct actual expenses for business use of your car, you probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most any cars (including trucks or vans) fit the IRS definition of a "luxury vehicle," regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a "luxury vehicle." 

To see how this works, let's hypothetically say you and an associate each bought a car. Your car costs $50,000 while your associate's costs $32,000. You both use your vehicles 75% for business. Cars are in the 5-year life depreciation category and the first-year depreciation for 5-year life items is 20%.  However, your depreciation deduction for the year (including any choice to expense part of the car's cost) will be subject to the first-year "luxury vehicle" limitation, which is $2,960 for 2009. Rates for current year (2010) are usually not available until later in the year.

Vehicle Depreciation Comparison

1. Vehicle Cost                                                     $50,000  $25,000
2. 20% First Year Depreciation                          10,000     5,000
3. Luxury Auto Limit                                               2,960       2,960
4. Allowable Deduction (lesser of 2 or 3)          2,960       2,960

As you can see, both you and your associate’s depreciation for the first year is the same amount because of the luxury auto limits. Thus, your associate will be able to deduct the same amount as you, even though his car had a much lower cost than yours.

In 2009 (and originally in 2008), to stimulate the economy, Congress has temporarily allowed businesses to recover the costs of capital expenditures faster than the ordinary depreciation schedule would allow, by permitting these businesses to immediately write-off 50% of the cost of depreciable property (e.g., equipment, tractors, wind turbines, solar panels, and computers) acquired in 2009 for use in the United States. This bonus depreciation provision also applies to cars but is limited to a maximum of $8,000. So, in our example above, the final annual depreciation for 2009 would be equal to $10,960 ($2,960 plus $8,000).  Note: This provision will not apply to 2010 unless retroactively reinstated by Congress.

Thus, your first-year depreciation (you used the vehicle 75% for business) will be $8,220 (10,960 x .75)

This may seem unfair, but there is an alternative that can help. Certain sports utility vehicles (a Suburban for example) exceed 6,000 pounds unloaded gross weight and have special rules.

For more information on how to maximize your business vehicle deductions, please give this office a call.

Taxpayers typically associate the special 2009 vehicle sales tax deduction with the purchase of a new car.  However, this deduction also applies to the purchase of new light trucks, motor homes, motorcycles and motor scooters that meet the “motorcycle definition.”  So if you are in the market for any of the above, you could qualify for this deduction. 

Here are some things that you should know about this new deduction:

• State and local sales taxes paid on up to $49,500 of the purchase price of qualifying vehicles can be deducted.

• The deduction is not limited to one vehicle, and the $49,500 limit is per vehicle.  Thus, if you purchase multiple vehicles during 2009, you can claim a deduction for all of them up to the purchase price limit.

• Qualified motor vehicles generally include new (not used) cars, light trucks, motor homes and motorcycles.

• Purchases must occur after February 16, 2009 and before January 1, 2010.

• This deduction can be taken regardless of whether or not other deductions on your tax return are itemized. If you claim the standard deduction, it is an addition to the standard deduction amount.

• This deduction is for 2009 only and you will get the tax benefit when your 2009 tax return is filed in 2010.

• The amount of the deduction is phased out for higher-income taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers (between $250,000 and $260,000 for joint filers).

The actual tax benefit generated by this deduction will depend upon your individual tax bracket, which is based on your income.  Let’s say that you are in the 25% tax bracket and you purchased a $35,000 vehicle.  If the sales tax was 8%, you would save $700 in taxes, determined as follows:

The sales tax deduction is $2,800 (8% of $35,000).
The tax benefit is $700 (25% of $2,800).

Keep in mind that this deduction can only reduce your tax liability to zero, so you may not receive the full benefit if you already pay a minimal amount of tax.

If you have questions related to your specific tax benefit or whether you qualify for this deduction, please give this office a call.

Current tax law provides for two separate credits for qualified plug-in electric vehicles.  One was passed in 2008 to provide a tax credit for the purchase of electric cars, and another was passed in 2009 to provide credit for low-speed or two- or three-wheeled vehicles commonly referred to as neighborhood vehicles.  The way the vehicle definitions for the two credits were written, it is possible that some vehicles may actually qualify for both credits but the IRS has announced that only one of the credits can be applied to any single vehicle.  The following is a summary of the requirements for both.

Four-Wheeled Electric Vehicle Credit (Code Sec. 30D) – For qualified plug-in electric drive motor vehicles placed in service in 2009, the credit is the sum of $2,500, plus an additional $417 for each kilowatt hour of traction battery capacity in excess of four kilowatt hours (Code Sec. 30D(a)(2)).  Although most individual taxpayers will view that as an electric car credit, the credit actually applies to any four-wheeled electric vehicle, and the maximum credit is based on the vehicle’s gross vehicle weight rating (GVWR); see table.

For new qualified plug-in electric drive motor vehicles placed in service in after 2009, the weight-based limitation on the maximum credit is removed, and the credit is made up of a base amount of $2,500 plus, for a vehicle drawing propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus $417 per kilowatt hour of capacity in excess of 5 kilowatt hours.  However, the credit is subject to phase-out when a manufacturer has sold 200,000 vehicles after 2009.

Low-Speed, Motorcycle & Three-Wheeled Vehicle Credit (Code Sec. 30) – A credit equal to 10% of the cost, maximum credit is $2,500 per vehicle, of electric drive low-speed vehicles, motorcycles, and three-wheeled vehicles purchased after February 17, 2009 and before 2012 is allowed.  This credit is not allowed if the vehicle also qualifies for the four-wheeled electric vehicle credit.  A qualifying vehicle must be either a:

• Low-speed vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 4 kilowatt hours.  This would include low-speed, four-wheeled vehicles manufactured primarily for use on public streets, roads and highways (neighborhood electric vehicles) which may also qualify for the four-wheeled vehicle credit.  In that case, this credit will not apply to that vehicle.

• Two- or three-wheeled vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 2.5 kilowatt hours.

Off-Road Vehicles & Golf Carts - Vehicles manufactured primarily for off-road use, such as for use on a golf course, do not qualify for either credit.

Purchased or Leased – For both credits, the qualified vehicle may be either purchased or leased by the taxpayer (but not for resale).  Original use of the vehicle must begin with the taxpayer.

Certification – The IRS is working on guidance on certification procedures for both of these credits.

Please call if you have questions related to this credit.