The Internal Revenue Service (IRS) has issued temporary and proposed regulations allowing full depreciation of certain vehicles under the section 280F rules for specifically modified light trucks and vans used in business.

The regulations exempt these vehicles from the definition and subsequent restrictions of “luxury passenger vehicles.”

The Air Conditioning Contractors of America (ACCA) recently informed its members of the IRS decision, stating, “This means you can not only fully deduct the vehicle, but also have the choice of taking the deduction in the first year or spreading it over five years. To qualify, however, the light trucks and vans must be modified to meet your needs — such as outfitted with racks. Trucks and vans straight off the lot won’t qualify.

“ACCA has been leading the fight to raise the depreciation limits on trucks and vans under 6,000 pounds because these vehicles constitute the bulk of the HVACR contracting community’s fleet. The current limit for depreciation, which must be taken over five years, is $15,300. Most of these vehicles are in the $25,000 to $30,000 range.”

According to the association, “The value of having a temporary rule, which must be made final within three years or it expires, is that it has the force of law where a proposed regulation on its own would not. This action corresponds to the spirit of Congress in raising section 179 general expensing rules for business equipment earlier this year to $100,000.” Section 179 covers vehicles weighing more than 6,000 pounds.

The next stage of the process is the public comment period. Comments and requests for a hearing must be submitted by Oct. 6. Following the process, the IRS will move to make the proposal permanent with a final rule.

“We need your help to make this change a permanent one,” said Kevin Holland, ACCA vice president, communications and membership services.

Contractor Reactions

“As vehicle costs have increased, the IRS didn’t keep up and fell behind,” said Larry Taylor, AirRite Air Conditioning Co. Inc., Fort Worth, Texas, and a News contractor consultant. “This simply allows the real world to catch up. There are still the rules relating to personal usage, etc., but this change certainly helps.

“Many contractors have held off making purchases until the next year because of the old rule and may have really needed the vehicle,” said Taylor. “Now we can run our business.”

“This appears to relax the restrictions on the annual depreciation that we can take on our vans,” said News consultant Charlie Klapperich of Western Building Services Inc., Denver. “I envision that as time goes by, the IRS will allow depreciation to be more aggressive — and not just in this area.”

Two News’ consultants didn’t share the same optimism.

“The relaxation of the rules will be helpful to some; however, those rules were put into effect because many business owners, not specifically contractors, were abusing the auto business deduction rules,” said Russ Donnici of Mechanical Air Service Inc., San Jose, Calif. “Contractors who have a legitimate cost structure for a business vehicle end up suffering under the old rules because of the abuse of others and sometimes themselves.”

Aaron York Sr. of Aaron York’s Quality Air Conditioning & Heating Inc., Indianapolis, stated, “While there is nothing there unimportant, it just seems that governmental regulations, drafted by attorneys, have so much double talk that it takes another attorney to put in layman’s terms what it means.

“Would it be better to write this in layman terms and cite them the total text availability? Is it available online? The information is vital for small business success, so it needs to be said.”

Sidebar: ACCA Member Testifies

Last April, ACCA member Brian Harvey, president of H&C Inc. of Laurel, Md., testified before the U.S. House Small Business Committee’s Subcommittee on Tax, Finance, and Exports, regarding the definition of vans and trucks used in business.

The following is excerpted from his testimony.

“For more than a year, small business organizations have had the opportunity to regularly meet with IRS representatives at a series of Small Business Forums hosted by the IRS Small Business/Self Employed division. These meetings have proven extremely valuable in establishing ongoing dialogues on issues that are of concern to small business.

“The need to revise the existing guidance on business vehicle depreciation under Section 280F of the Internal Revenue Code was raised early in our round of meetings. We were gratified to see that the IRS placed the subject of revising guidance under 280F among its top-10 issues on its work plan for this year.

“Adjustment of the 280F guidance is critical to our members because they rely on vehicles to conduct their business. Customers don’t come to them, they go to customers. When Section 280F … was enacted in 1984, the definition predated the creation of whole classes of new vehicles. Today, these vehicles — such as minivans, a wide variety of vans and trucks that weigh less than 6,000 pounds, and the sports utility category — dominate the small business marketplace.

“The decision by our members of the type of vehicle to use for business purposes is dictated by requirements of size, reliability, and function, with tax considerations largely being secondary. Our members … strongly believe that the rules dealing with the definition of a van and truck need to be upgraded to reflect current market realities. At the same time, we understand the need to maintain the tax compliance required for verifying business use of a vehicle.”

According to Harvey, ACCA would propose the following:

  • Guidance that focuses less on the nature of the vehicle but more on how it is being used.

  • Guidance that allows the new vans, trucks, and SUVs into the category that is currently ‘vans and trucks,’ without regard to the strict weight limitations, but with the only real limiting issue being whether they are being substantially used for business purposes.

  • Guidance that would permit the ability of the business owner to apply section 179 expensing rules.

  • Guidance that would change the dollar limitations to more realistic levels.

  • Guidance with a more realistic amortization period. This means shortening depreciation time.

    “The burden facing a business owner is having section 179 expensing address one set of vehicles and 280F another, a determination based only upon the weight of the vehicle,” said Harvey. “This adds unnecessary confusion to the tax code. If a vehicle is used for business, the weight shouldn’t make any difference. This would help the contractor who buys the heavier vehicles and beats them up pretty fast. By simplifying and raising the exemption, Congress and the administration will help achieve the goal of stimulating capital investment in order to spur economic growth.”

    Publication date: 07/21/2003