New Tax Break For Your New Car

Ah, life on the road. The good news for business owners who spend a lot of time behind the wheel is that you’re entitled to a number of vehicle-related tax deductions. Now, thanks to the Recovery Act, you’ve got one more tax break in your arsenal.

If you purchase a vehicle before the end of the year, you’ll be able to deduct the sales tax and get an immediate tax benefit. That’s a change from years past, when business owners added the sales tax to the cost of the vehicle, and recovered it through depreciation or expensing, according to William Massey, senior tax analyst at Thomson Reuters. There are, of course, a few limitations: You can only deduct sales tax on up to $49,500 of the vehicle’s purchase price. And this deduction is phased out if your modified adjusted gross income is more than $125,000 for single filers and $250,000 for joint filers.

Any individual (not just a business owner) who fits the bill can claim this sales tax deduction. But the tax break may be particularly useful for self-employed individuals who usually depreciate or expense the vehicle’s cost, Massey says. For instance, by not having to expense sales tax, a business owner wouldn’t have to reduce his or her expensing limit, and therefore wouldn’t have to reduce the amount of other assets that can be expensed, he says.

To note: The tax break is designed for individuals, so sole proprietors and people who run limited liability companies that elect to be disregarded as an entity would be entitled to claim the deduction, Massey says. But the IRS will need to issue further guidelines to clarify whether C or S corporations can claim the break, he says

For more on tax provisions provided by the stimulus package, check out Karen Klein’s column here.

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