The term "luxury auto" for federal tax purposes is somewhat of a misnomer. The IRS's definition of "luxury auto" is likely not the same as your definition.
The IRS limits the amount of depreciation that may be claimed on a passenger automobile used for business. These limits are popularly referred to as the "luxury car rules." Taxpayers who use the IRS standard business mileage rate (which is 55 cents-per-mile in 2009) do not have to worry about the depreciation allowance because the cents-per-mile rate includes depreciation.
MACRS
Taxpayers who choose to take a depreciation deduction for their vehicles start with the regular depreciation tables under the Modified Adjusted Cost Recovery System (MACRS). The vehicle must be used 50 percent or more for business purposes. The cost of a vehicle is depreciated over six years. In Year 1, 20 percent is depreciable; 32 percent in Year 2; 19.2 percent in Year 3; 11.52 percent in Years 4 and 5; and 5.76 percent in Year 6.
Dollar limits
Under Code Sec. 280F, annual dollar limits apply to "luxury autos." The applicable set of annual dollar amount limits depends on the date on which the vehicle is placed in service. The dollar limits are adjusted for inflation annually.
The annual maximum depreciation amounts for passenger automobiles first placed in service in calendar year 2009 are:
- $2,960 for the first tax year;
- $4,800 for the second tax year;
- $2,850 for the third tax year; and
- $1,775 for each tax year thereafter.
Bonus depreciation
In 2008, Congress authorized bonus depreciation as part of the Economic Stimulus Act of 2008. Fifty percent bonus depreciation applied in 2008 to vehicles unless the taxpayer elected out of it. This resulted in higher dollar limits ($8,000 if bonus depreciation was claimed for a qualifying vehicle placed in service in 2008, for a maximum first-year depreciation of no more than $10,960 for autos). Congress may extend bonus depreciation into 2009.
