2012 Cadillac Escalade

Last year I advised you that 2011 was a great time to buy an SUV for your business, because of the extremely generous 100 percent bonus depreciation available for that year only.

If you didn’t take my advice and buy that SUV, you may want to do so by the end of 2012. Although the deductions you can get for buying a business SUV this year are not as generous as in 2011, they’re still pretty great. And they may not come around again.

As I said in my previous column on the subject, there is an annual cap on the amount of depreciation you can take on a passenger vehicle each year. The cap for a passenger vehicle purchased in 2012 is $11,160.

However, this cap applies only to passenger vehicles — those with a gross loaded weight of less than 6,000 pounds. If you buy an SUV that weighs more than 6,000 pounds, the cap won’t apply.

This can enable you to take an enormous first-year deduction in 2012 because you can take 50 percent bonus depreciation on top of a $25,000 Section 179 deduction.

Let’s say you buy and place into service during 2012 an SUV that weighs more than 6,000 pounds and use it 100 percent for your real estate business. You’ll be able to deduct $40,000 of the vehicle’s cost on your 2012 tax return. Here’s how:

• First, you can deduct $25,000 of the cost using IRC Section 179, which permits business owners to deduct a substantial amount of business equipment in a single year; this deduction is capped at $25,000 for heavy SUVs.
• Next, you can deduct an additional $12,500 using 50 percent bonus depreciation (you have only a $25,000 basis left after taking your Section 179 deduction, so this deduction is limited to $12,500).
• Finally, you can take $2,500 in regular depreciation on the remaining $12,500 basis in the SUV.

Note that these calculations are based on using the SUV 100 percent for your real estate business. If you use it less than that, your deduction will be reduced by the percentage of your personal use. Moreover, you must use the SUV at least 51 percent of the time for business to take advantage of the Section 179 bonus depreciation deduction.

“Bonus depreciation” is a special temporary tax provision that allows you to deduct a substantial amount of the cost of business equipment in a single year, with no annual limit. In 2011, the limit was an unprecedented, incredible 100 percent. For 2012, bonus depreciation is limited to 50 percent, much less than last year, but still a lot.

Bonus depreciation is scheduled to expire at the end of 2012. Bonus depreciation has expired before and been extended, so it could be extended again by Congress. However, no one knows for sure what will happen, including Congress. Bonus depreciation is just one of many tax cuts that will expire at the end of the year. With partisan gridlock in Washington and our enormous budget deficits, it is impossible to predict what will happen.

If bonus depreciation expires and you buy a heavy SUV in 2013, you’ll be able to deduct only $27,500 of the cost the first year, instead of $40,000 — $12,500 less. So you should think about acting now.