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Tax Loopholes for Luxury Car Subsidies

All Smiles Come April

21Jan

Before, luxury cars were available only to those rich people who can afford them. However, with the evolution of tax laws and rules enacted by some states and issued by the United States Internal Revenue Service (IRS) respectively, it is now possible to own and drive Hummers, Bentleys, and other luxury cars. You must only know how to deal with the depreciation of luxury cars and Luxury Automobile Limitations (LAL). In addition, the United States tax system also features the Modified Accelerated Cost Recovery System or MACRS.

Take note also of some business insurance quotes as they may help you own and drive your dream luxury cars.

LAL

What is a  Luxury Automobile Limitation? It is simply the amount that can be claimed by luxury car owners as deductions because of depreciation. Some auto insurance quotes  also discuss Luxury Automobile Limitations.

MACRS

What is MACRS? It is the system used by taxpayers to determine tax deductions based on depreciation. Luxury car owners pair MACRS with section 179 of the tax code to determine the allowable tax deductions.

The Loopholes in the Tax Code

Many luxury car enthusiasts avoid luxury car limitations by taking advantage of the loopholes in the tax code, particularly  section 179. Sec. 179 of the tax code governs the rule on depreciation and the amount that can be claimed as deductions based on depreciation.

Basically, this section allows entrepreneurs to deduct the cost of a certain personal property (like cars) they purchase for business use against their income taxes during the taxable period. Because of the loophole under section 179, it appears that the US government subsidizes leases and purchases of luxury cars. All they have to do is to make it appear that they use these luxury cars in the regular course of business. LAL does not apply to luxury car leases, which makes them attractive to some car enthusiasts.

To illustrate, a business owner simply needs to state that he uses his Lexus or Audi A8 at least 51% of the time for business purposes.

For example, Steve bought a 2015 Lexus CT 200H for $32,200. He uses it 60% of the time for business purposes and 40% of the time for personal purposes. To determine the bonus under section 179, simply multiply the percentage of the business use with the cost of the property. In the example, the amount which can be claimed as deduction is $19,320 (.60 x $32,200).

Limitation

However, the deduction under this section cannot be availed of if the luxury car is used less than 50% of the time for business purposes.

Evolution of the Tax Code and Luxury Tax

Car enthusiasts still need to deal with Luxury Car Taxes or LCTs. What is a Luxury Car Tax? It is a tax on luxury cars that exceeds certain threshold amounts provided by the tax code, pertinent laws and rules issued by the IRS.

Luxury tax rates are higher than regular tax rates because they are imposed on expensive vehicles, which are presumably bought by persons who can shell out more money than the average person.

No real Luxury Car Taxes have been imposed in the U.S. since 2002. However, some taxes have a similar effect.

Laws Enacted by Some States to Regulate the Abuse of the Loophole

Take for example the Gas guzzler tax. The Environmental Protection Agency imposes this tax on vehicles that do not meet the required minimum fuel efficiency standard. In 2013, it seems that luxury taxes are indirectly imposed on luxury cars since the Gas Guzzler Tax is levied only on sports cars, high-performance cars and large-engine luxury cars.

Another tax law that seems to have the effect of the obsolete luxury car tax is the law on renewal registration fees implemented in the state of Iowa. To illustrate, a sedan valued at $20,000 carries a renewal fee of $200 while a sedan valued at $65,000 carries a renewal fee of $650. California, Minnesota and Louisiana are also some of the states that assess and impose taxes based on the value of the luxury car.

IRS rules and revenue procedures

The IRS saw the loophole under the aforementioned section of the tax code. Hence, in 2013, it issued a new revenue procedure that caps the amount at $21,885, including the bonus depreciation allowance for the first five years of luxury car ownership.

In conclusion, the IRS and some states have somehow limited the abuse of the loopholes in the tax code by either issuing rules that reduce the amount that can be claimed as deduction or enacting laws that impose additional taxes on luxury cars. 

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