Year in and year out, many tax clients rely on purchasing a new vehicle used in their trade or business as a last minute tax planning strategy. Tax professionals surely encourage tax planning one or more years in advance. But we all know our clients, more often than not, realize the pain they are about to face each year somewhere in the third quarter or certainly by Thanksgiving.
Fortunately and especially for those who have professional or operating business clients, section 179 100% depreciation offers some last-minute saving grace. For example, a new 2015 Cadillac Escalade could easily carry an $80,000 purchase price. Assuming 100% business use, the 2014 tax deduction for a third quarter purchase would amount to—
Based on the foregoing, our tax clients could conceivably generate a sustainable $33,250 tax deduction before December 31, 2014. Depending on your state income tax levels, that last minute deduction could save your tax client as much as $15,000 in federal and state income taxes. Usually, such a strategy is not a hard sell. Now, let’s take a look at the enabling law.
Section 179(b)(5) imposes a limitation on costs taken into account for computing the 100% depreciation on certain “passenger vehicles.” Subpart A of the foregoing provision limits the cost of any sport utility vehicle to be taken into account for section 179 depreciation expense purposes to $25,000. Importantly, subpart B defines a sport utility vehicle, in meaningful part, as –
1. any 4-wheeled vehicle,
2. primarily designed or used to carry passengers over public streets, roads, or highways,
3. not subject to the provisions of section 280F,
4. which Gross Vehicle Weight Rating (GVWR) is not greater than 14,000 pounds.
Chiefly, this provision teaches our 2015 Cadillac Escalade cannot exceed GVWR 14,000 pounds. Fortunately, the two-wheel-drive model is rated by the manufacturer at GVWR 7,100 pounds, while its four-wheel-drive model is rated at GVWR 7,300 pounds. Based on the foregoing, the upper weight limit criterion is satisfied.
Now we need to turn our attention to section 280F. Section 280F substantively limits the section 179 deduction for “passenger automobiles.” Subsection (d)(5) defines a passenger automobile as –
1. a 4-wheeled vehicle,
2. manufactured primarily for use on public streets, roads, and highways, and
3. which is rated at 6,000 pounds unloaded gross vehicle weight or less.
According to section 280F, if our 2015 Cadillac Escalade has an “unloaded gross vehicle weight” of 6,000 pounds or less, we cannot use section 179 but, rather, our depreciation expense is limited to the amounts specified in section 280F(a).
The unloaded gross vehicle weight is generally known as the “curbside weight.” There seems to be little doubt section 280F(d)(5) countenances the difference between curbside weight and GVWR inasmuch as it further provides, “In the case of a truck or van, clause (ii) shall be applied by substituting ‘gross vehicle weight’ for ‘unloaded gross vehicle weight’.” In the case of our 2015 Cadillac Escalade, the manufacturer specs the curbside weight at 5,594 pounds for the two-wheel-drive model and 5,840 pounds for the four-wheel-drive model.
It appears our client’s tax saving dream just materially evaporated. Since the unloaded gross vehicle weight is 6,000 pounds or less, our client cannot invoke section 179 depreciation expense. But, wait!!!!
Fortunately, by means of executive fiat, our client is saved! Relevant section 280F treasury regulations renew the day. 26 C.F.R. § 1.280F-6(c) provides:
(c) Passenger automobile — (1) In general. Except as provided in paragraph (c)(3) of this section, the term “passenger automobile” means any 4-wheeled vehicle which is:
(i) Manufactured primarily for use on public streets, roads, and highways, and
(ii) Rated at 6,000 pounds gross vehicle weight or less.
Do you see it? The treasury regulations omitted the term “unloaded” from the definition of a passenger automobile. Thus, the section 280F “passenger automobile” definition is expressed in terms of a gross vehicle weight rating (6,000 pounds or less), while the section 280F statutory expression is in terms of unloaded gross vehicle weight (also 6,000 pounds or less). Thus, the regulation implicates several tax planning issues.
First, Internal Revenue Manual 184.108.40.206.3.4 (01-01-2006)
addresses the “Authority of the Regulations.” It provides the IRS is bound by the regulations while the courts are not. As a result, the regulatory anomaly remains favorable to the taxpayer and unfavorable as to a different enforcement by the IRS.
Second, the 26 C.F.R. § 1.280F-6(c) anomaly enables section 179 depreciation expense for vehicles where the GVWR is greater than 6,000 pounds, but the curbside weight is 6,000 pounds or less. Recall the 2015 Cadillac Escalade is such a vehicle. It’s curbside weight is 6,000 pounds or less while it’s GVWR is greater than 6,000 pounds. That’s why our tax client purchasing the 2015 Cadillac Escalade is a happy camper with treasury’s change in public policy.
Third, the 26 C.F.R. § 1.280F-6(c) anomaly removes the 2015 Cadillac Escalade from section 280F “listed property” definition. That is, our tax client’s 2015 Cadillac Escalade is now not covered by all those nasty listed property consequences. This enables our tax client’s personal use included as compensation without further limiting or qualifying the section 179 deduction.
Of course, Caveat Emptor. Do your research and come to your own professional conclusion. But, in my book, we have a change in public policy by executive fiat.
Original Post By: David Jenkins, Ph.D.