It may come as a surprise to many electrical contractors who use vans and light trucks in their operations, but it is difficult to fully recover the costs of those vehicles under our tax rules. Even with the tax cuts of recent years, it is still almost impossible to fully recover the cost of those vehicles through tax write-offs.
Despite the passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)—which increased the amounts that may be written-off as Section 179 expenses or claimed as first-year “bonus” depreciation—a cap or ceiling remains on all amounts that may be deducted for business vehicles. It is only recently, however, that the tax authorities have acknowledged that it is not always possible for many businesses to fully recover the cost of vans and light trucks used in their operations.
The Internal Revenue Service (IRS) has put in place new rules that are already helping alleviate this problem. The IRS has also published guidelines for business vehicle write-offs that will help ease any changes necessary.
The write-off limits
Tax deductions are designed to permit electrical contractors to fully recover the cost of a basic automobile used in the business within a five-year period. When it comes to vans and light trucks however, even contractors with a valid business need cannot recover the vehicle’s total cost over that same period. In fact, only recently has the IRS recognized that these vehicles generally cost more than passenger automobiles while still subject to the same so-called “luxury car” depreciation limits.
Unfortunately, the IRS does not have the authority to raise the deduction limits on van and light truck costs, a raise that would reflect their higher cost. The IRS will, however, issue inflation-adjusted dollar limits for vans and light trucks placed in service in 2005 that will reflect a higher rate of price inflation.
This action, when combined with the substantial increases in the first-year depreciation limits for all new passenger automobiles—including vans and light trucks—under the recent tax law changes, is already providing some relief.
Thus, an electrical contractor electing the additional first-year depreciation permitted by Section 179 can recover the full cost of new business vehicles costing up to the $100,000 first-year expensing election limit. Naturally, if total acquisitions exceed $400,000, the Section 179 write-off will be reduced, dollar-for-dollar, by any excess.
The IRS and the Treasury Department have concluded that a limited exclusion from the luxury-tax classification of passenger automobiles is warranted for light trucks or vans. The exclusion they have proposed would be based on objective factors and would not provide an incentive to purchase a truck or van when a less-expensive automobile would be sufficient to fulfill a business need.
Necessity not luxury
Under guidelines recently introduced by the IRS, there are special exclusions for vans and light trucks. Those guidelines exclude from the definition of passenger automobile any truck or van that is a so-called “qualified nonpersonal use” vehicle.
Qualified nonpersonal use vehicles include some basic trucks and vans. But more often the term refers to light trucks and vans that have been specially modified by installing permanent shelving or painting the vehicle to display advertising or the company’s name so that they are unlikely to be used more than minimally for personal purposes.
Since few electrical contractors are likely to purchase these specially manufactured or modified vehicles unless motivated by a valid business purpose that could not be met with a less-expensive vehicle, the IRS feels they can safely exclude them from the luxury-car definition.
The luxury rules
Automobiles and other forms of transportation that our lawmakers feel might lend themselves to personal use (such as airplanes, trucks, boats, etc.) are considered to be “listed” property. As listed property, unless used more than 50 percent for business, the depreciation deductions are restricted.
What’s more, even though used more than 50 percent for business purposes and fully qualifying for tax write-offs, there are those already mentioned deduction limits for what the tax rules label “passenger automobiles.” These further limits, often referred to as the “luxury car” limits are based on 100 percent business use. Naturally, if business use is less than 100 percent, the limits must be reduced to reflect the actual business-use percentage.
Under the luxury-car caps, a passenger automobile is defined as any four-wheeled vehicle manufactured primarily for use on public streets, roads and highway that has an unloaded gross vehicle weight of 6,000 pounds or less. A truck or van (including a or minivan) has, until now, been treated as a passenger automobile if it has a gross vehicle weight (i.e., maximum total weight of a loaded vehicle as specified by the manufacturer) of 6,000 pounds or less.
Many electrical contractors, particularly smaller operations, may convert a company car to personal use or a personal vehicle may be converted into a depreciable business asset. In bigger operations, property may change from being used in a for-profit business to use in overseas operations or use on a project financed by tax-exempt bonds.
The IRS has proposed guidelines for determining the annual depreciation allowance for any vehicles or property for which the “use” changes. Generally, the proposed regulations require so-called “personal use” property converted to business or income-producing use to be treated as having first been placed in service by the electrical contractor on the date of the conversion.
The amount depreciated, the property’s “basis,” would be the lesser of its fair-market value or adjusted depreciable basis at the time of the conversion.
A conversion of a vehicle or other property from business or income-producing use to personal use is treated as a disposition of the property. Of course, no gain, loss or recapture of previously claimed depreciation is recognized as a result of this type of conversion.
A change in the use of depreciable property can also occur when a taxpayer begins or ceases to use the property predominantly outside the United States, when the property changes to tax-exempt bond financed property or when the property changes to or from tax-exempt use property.
Until these rules are adopted or finalized, all changes in use for depreciable property after Dec. 31, 1986, should be treated as if they had occurred on the first day of the year of change. Furthermore, that converted property may be reported using any reasonable depreciation method, so long as it is consistently applied.
Finally some action
Only in the eyes of our lawmakers could the vans and light trucks used by so many electrical contracting businesses be considered as suitable for personal use or considered to be a “luxury” vehicle. The IRS has finally acknowledged that deduction caps prevent many electrical contractors and others from fully recovering the cost of vans and light trucks.
Changes in the inflation prices released by the IRS will help relieve this situation. Also helping, again according to the IRS, is a new limited exemption for vans and light trucks from classification as “luxury cars.”
These regulations have now been finalized, but will your electrical contracting business take full advantage of them? Will you use these new rules to take the first steps towards fully recovering the costs for your operation’s vans and light trucks?
Finally, the Energy Tax Incentives Act of 2005 contains enhanced tax incentives to encourage the purchase of environmentally friendly “green” vehicles. These incentives, in the form of several tax credits, will apply to vehicles placed in service after 2005. What’s more, they are available whether the vehicle is for personal or business use.
Consider these points, they just might help your business. EC
BATTERSBY is a freelance writer based in Ardmore, Pa. For more than 25 years, his tax and financial features have appeared in ELECTRICAL CONTRACTOR and other leading trade publications.