1. Remove the luxury limits on business car deductions
2. Reinstate three-year depreciation from the Tax Reform Act of 1981
3. Implement a refundable investment tax credit

After tax reform in 1981, the business person could buy a car and

• claim an investment tax credit, and
• write-off the total cost of the car in three years

As the law stands now, the business taxpayer who buys a car on January 1, 2009, is going to face a luxury limit on his or her first year deduction of $2,960 or so (the luxury limits for 2009 are not yet released, but based on historical standards, you can pretty much bet on something close to $2,960.

Example. Pay $30,000 for the car in 2009, use it 100% for business–and you are stuck with a maximum of about $2,960 in first year deductions.

To make matters worse, the total write offs in the first six years total only about $15,000 on this car. The 2009 tax law as it stands right this moment creates a DISINCENTIVE.

In 1981, tax law gave incentives for business purchases. Had you purchased this $30,000 business car in 1981, you received an investment tax credit of $1,800. This was a tax freebie–a dollar for dollar tax credit with no reduction in your basis.

Next, the 1981 changes allowed you to deduct $7,500 in first-year depreciation.  Then, you deducted $11,400 in year 2 and $11,100 in year 3.

The WOW Factor

By reinstating the rules from 1981, the business person buying a car today and using it 100% for business would

• deduct the entire $30,000 in the first three years, and
• obtain an $1,800 investment tax credit tax refund with no strings attached, except the requirement to keep the car in business service for three years or refund part of the credit

We think we have a GREAT IDEA: Reinstate the 1981 rules NOW!

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© W. Murray Bradford, CPA and TaxStrategiesBlog, 2008. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to W. Murray Bradford, CPA and TaxStrategies Blog with appropriate and specific direction to the original content.