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• Year end alert.
• Vehicle expense deductions reminders.
• Planning for capital gains and losses is harder for 2003.
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight

Year end alert.

This newsletter covers some issues that I want you to be aware of before the end of the year. Relating to this, I highly recommend that you consult with a tax advisor about the issues that I discuss that you believe relate to you. Please view the newsletter as a starting point for further investigation and discussion.

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Vehicle expense deductions reminders.

There is a huge amount of interest in the expense election available for SUVs. Remember, the election doesn't just apply to SUVs, but applies to most business equipment. Under the election, up to $100,000 of the cost of certain business assets may be expensed in the year the asset was purchased and placed in service. The deduction is phased out by the cost of qualifying property acquired during the taxable year in excess of $400,000. (The new limitations apply for taxable years beginning after 2002 and before 2006.)

What is special for the SUVs and certain other vehicles is the deduction for depreciation of business-use vehicles is generally limited. (See Corrected Question and Answer, below.) The limitation does not apply for automobiles with a gross (unloaded) weight over 6,000 pounds or for trucks and vans (including SUVs) with a gross (loaded) weight over 6,000 pounds. (The GVWR is shown on a label on the inside edge of the driver's door.) The IRS also recently issued temporary regulations excluding any truck or van that is a qualified nonpersonal use vehicle under §1.274-5T(k) of the income tax reglations from the "luxury vehicle" depreciation limitations. These nonpersonal use vehicles have been modified so that they are unlikely to be used for personal purposes.

Remember the amount that can be expensed for a taxable year is limited to the amount of taxable income from the active conduct of a trade or business Also remember that the vehicle must be used more than 50% for business purposes, and a reduction to 50% or less of business use during the vehicle's five-year depreciable life results in recapturing the expense deduction. Be prepared to document the business use of the vehicle, probably by keeping a log of the use.

With the recent changes in the tax laws, there are some significant tax benefits available for the business use of vehicles, but to secure those tax benefits requires satisfying difficult requirements. Be sure to consult with your tax advisor about this.

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Planning for capital gains and losses is harder for 2003.

Since different maximum tax rates applied for long-term capital gains before May 6 and after May 5, 2003, the blending of dates and holding periods for capital gains and losses must be closely monitored. Remember that short-term capital losses are applied first to short-term capital gains and long-term capital losses are applied first to long-term capital gains.

For example, Sam has a $40,000 long-term capital gain after May 5, 2003; a $40,000 short-term capital gain before May 6, 2003 and a $40,000 long-term capital loss after May 6, 2003. The long-term capital loss is applied first to the long-term capital gain, resulting in the short-term capital gain of $40,000 being taxed at ordinary income rates. If Sam waited to sell the second long-term gain asset until 2004, the long-term loss could have been applied to the short-term gain for 2003, eliminating the tax at ordinary income tax rates and the long-term gain recognized in 2004 would (probably) be taxed at the 15% long-term capital gains rate.

As you can see, timing is important for capital gains and losses. If you have significant transactions that you are planning for, consult with a tax advisor.

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P.P.S.

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.