IRS Depreciation Deduction Limitations & Lease Inclusion Amounts - 2013

The IRS has issued the depreciation deduction limitations and lease inclusion amounts for vehicles purchased or leased in 2013. In general, there are two methods for computing vehicle expenses, the standard mileage rate (56.5 cents per mile for 2013; 55.5 cents per mile for 2012) or the actual expense method. If you use the standard mileage rate method you may not depreciate your car or deduct lease payments. If you use the actual cost method, you may take deductions for depreciation or lease payments, registration fees, licenses, gas, insurance, oil, repairs, garage rent, tolls, tires and parking fees.

However, there are limitations imposed on the amount of depreciation allowed for a passenger automobile, including the amount under the Code Sec. 179 election to expense depreciable property and the allowance for bonus depreciation. Larger limitations apply to trucks and vans. For passenger automobiles (other than trucks and vans) placed in service in calendar year 2013, the depreciation limitations are $3,160 ($11,160 if bonus depreciation is claimed) for the first tax year; $5,100 for the second tax year; $3,050 for the third tax year; and $1,875 for each succeeding tax year. For trucks and vans placed in service in calendar year 2013, the depreciation limitations are $3,360 ($11,360 if bonus depreciation is claimed) for the first year; $5,400 for the second year; $3,250 for the third year; and $1,975 for each succeeding tax year.

Leased vehicles have other deduction limitations. If a "luxury car" is leased, a certain dollar amount must be added back to income (the "lease inclusion" amount). The add-back is an attempt to equalize the lease payment deduction with the depreciation limitation available for purchased vehicles because leased vehicles cannot be depreciated. The inclusion amounts for leased passenger automobiles and vans and trucks vary with the fair market value of the vehicle.

Determining whether you should use the standard mileage rate or actual expense method, or whether to lease or purchase a vehicle may depend in part on the depreciation deduction limitations and lease inclusion amounts provided by the IRS. In addition, there are tax credits available for some energy-efficient vehicles that should be considered when making these decisions.

Regardless of the method, if your vehicle is used for personal, as well as business purposes, only expenses or mileage attributable to the business use are deductible. Therefore, the business use of the vehicle should be substantiated. The goal is to produce the lowest overall transportation costs. Consequently, an analysis of the after-tax costs of your business vehicle expenses would be beneficial. Please call us at your earliest opportunity to arrange an appointment to discuss your vehicle expense alternatives and substantiation requirements.