If you buy a vehicle, you can depreciate the cost, as well as deduct other expenses associated with owning a vehicle (insurance, gasoline, etc.). However, the tax law puts a cap on the annual depreciation limits, and the IRS has released figures for vehicles placed in service in 2010. The dollar limit for a passenger vehicle placed in service in 2010 and used entirely for business is $3,060. The limit for 2009 had been $10,960 for a vehicle eligible for bonus depreciation (i.e., a new vehicle); the limit for a pre-owned vehicle was $2,960. Next year, the depreciation limit for this vehicle is $4,900, the year after it is $2,950, and for each subsequent year it is $1,775. Limits are prorated if the vehicle is used partly for personal driving.
Slightly higher limits apply to trucks and vans placed in service in 2010. For this year, the limit is $3,160; it’s $5,100 next year, $3,050 the year after, and $1,875 each year thereafter. Again, limits are prorated if the vehicle is used partly for personal driving.
Those purchasing a heavy SUV (more than 6,000 pounds) can expense the purchase price up to $25,000 and then claim regular depreciation on the balance (subject to the dollar limit above).
For vehicles that are not suitable for personal use, such as a van outfitted with shelving and only a jump seat, there is no dollar limit. The full purchase price can be depreciated without any cap.
If you lease a vehicle in 2010 that has a sticker price of more than $16,700, you can deduct the lease payments and other expenses for operating the vehicle, but you will have to include a dollar amount in income (called an inclusion amount). This is a figure that you take from an IRS table; it is supposed to equate the write-off whether you buy or lease the vehicle. The fact is that the inclusion amount, which is based on the value of the vehicle when it’s placed in service, is very modest. For example, a passenger car valued at $35,000 has an inclusion amount for 2010 of $38.
Ultimately, the choice to buy or lease a vehicle usually isn’t based on only tax deductions. It also includes:
• Expected driving for the year. If it’s more than 15,000 miles, leasing may be too expensive.
• Choice of vehicle. Leasing is a way to afford to drive a more expensive vehicle than if it had to be purchased.
Decide which vehicle you would like to drive and then determine the financial costs as well as the tax and emotional benefits for buying versus leasing so you can make a fully-informed decision.