Individually Owned Vehicles Used for Non-Business Purposes
The following criteria are from the Personal Property Tax Relief guidelines as amended September 2001 as they relate to individually owned vehicles.
Preponderance of Use Test
Only motor vehicles being used for a non-business purpose qualify for the tax relief provided for under PPTRA. A vehicle is used for a non-business purpose when the preponderance of its use is for other than business purposes. The preponderance of use for other than business purposes will be met if the vehicle is used for trade or business purposes less than 50% of the time. The preponderance of use test will not be deemed satisfied if one of the three tests listed below is satisfied.
1. Internal Revenue Code § 179 Test
In general, Internal Revenue Code § 179 allows a taxpayer to elect to expense the cost, or a portion of the cost, of certain business property (including motor vehicles) in the taxable year in which the property is placed in service. The cost of the vehicle would be expensed on a taxpayer's federal income tax return. This section allows taxpayers to expense the cost of motor vehicles if more than 50% of their use is in a trade or business.
In the year a motor vehicle is placed in service, it will not qualify for tax relief if it is expensed for federal income tax purposes under Internal Revenue Code § 179. If a motor vehicle is not used predominantly in a trade or business in any year before the end of the Modified Accelerated Cost Recovery System (MACRS) recovery period (see section entitled "Depreciation Test" below), the expense allowed under Internal Revenue Code § 179 must be recaptured. Any motor vehicle that is subject to this recapture could be eligible for personal property tax relief. In years subsequent to the MACRS recovery period, the business/nonbusiness use of the motor vehicle will be determined based on the mileage test criteria.
2. Depreciation Test
A deduction for depreciation is allowed for a motor vehicle pursuant to Internal Revenue Code § 168 which provides for a reasonable deduction to cover the cost of the exhaustion, wear and tear, and obsolescence of property engaged in the production of income or property used in the trade or business.
If a taxpayer uses a motor vehicle for both business and nonbusiness purposes, a depreciation deduction is not allowed for the full depreciable basis or cost of the motor vehicle. Instead, the basis is reduced by the percentage of the nonbusiness use of the motor vehicle to determine the adjusted basis.
The depreciation deduction is allowed on the adjusted basis. If the adjusted basis is 50% or more of the full depreciable basis of a motor vehicle, it will not qualify for tax relief.
For depreciation purposes, motor vehicles are five-year property under the federal Modified Accelerated Cost Recovery System (MACRS). Generally, the period for MACRS (the "MACRS recovery period") will cover all or a portion of six taxable years. In years subsequent to the MACRS recovery period, the business/nonbusiness use of the motor vehicle will be determined based on the mileage test.
3. Mileage Test Criteria
A deduction is permitted for federal income tax purposes for the use of a motor vehicle in connection with a taxpayer's trade or business. Employees can deduct a business expense for the use of their personal motor vehicle in connection with an employer's trade or business.
The deduction is allowed for actual expenses or is computed by multiplying the miles driven for the business by the standard mileage rate. In addition, an employer may provide reimbursement to the employee for expenses incurred from the use of the employee's motor vehicles in connection with the employer's trade or business. The reimbursement may be for actual expenses or based on a mileage rate.
If the annual business mileage of a motor vehicle, expensed or reimbursed, equals or exceeds 50% of the overall annual mileage, the vehicle will not qualify for tax relief. For the purposes of the mileage test, the ratio will be rounded to the nearest one tenth of one percent (three decimal places).