Us luxury tax on cars

Drive through the nicer parts of Los Angeles and see all the late model luxury vehicles. Mainly expensive Mercedes, BMW’s, Audis, Bentleys, and big SUV’s.

Most are leased because of a loophole in the tax code allowing the business write off of almost the entire lease payment multiplied by the percentage of business use (which is rarely audited by the IRS).

Real estate brokers (many selling just one house a year), attorneys, business owners, and drivers of corporate cars drive expensive leased vehicles because their lease payments can almost entirely be written off using an exaggerated business use percentage.

If a vehicle is purchased, the allowable depreciation is limited to the value of an ordinary basic car, so the additional depreciation amount for expensive luxury vehicles cannot be written off.

However, this “luxury automobile limitation” does not apply to leased vehicles, which is main reason that most of the late model vehicles in Los Angeles are leased.

Instead of having the major depreciation limits for purchased luxury vehicles, the business lessee deducts the FULL business use percentage of their lease payments adjusted by a just a tiny “inclusion amount” added back to income.

This inclusion amount added back to income is so small that the owner of a $150, 000 vehicle stating that 85% of his miles driven are for business can write off virtually 85% of his big lease payments. These tiny "inclusion amounts" are taken from a price-based table issued in IRS Publication 463, Travel, Entertainment, Gifts, and Car Expenses.

And there is no exclusion amount for leased vehicles with a Gross Vehicle Weight Rating (GVWR – the manufacturer’s specified fully loaded vehicle weight) over 6, 000 pounds. This is the reason that so many of these luxury vehicles rolling around Los Angeles are big, gas-guzzling SUV’s. Note that even a relatively small all wheel drive Volvo XC-90 has a qualifying 6, 003 pound GVWR.

There are more major loopholes. This over 6, 000 pound GVWR loophole for leased vehicles works even better tax wise for purchased vehicles. There are no depreciation limits on purchased vehicles with a GVWR over 6, 000 pounds. Couple this with a Section 179 deduction and $25, 000 of the vehicle cost can be deducted annually.

And then after $50, 000 deductions for business use over two tax years (could be 13 months), the grossly over depreciated vehicle can be given to another family member and there is no recapture of the over depreciation because there is no sale. Should our tax code provide big tax incentives to buy or lease big gas guzzling SUV's?

There is no reason why the tax code should subsidize business use of luxury cars and SUV’s. The vehicle purchase or lease tax deduction for all business use should be limited to that for a $30, 000-$40, 000 vehicle with no GVWR, Section 179, or leasing loopholes.