Excise Taxes on New Cars

So you're thinking of purchasing a new vehicle for your business? You've done your comparison shopping and have figured out your business needs and budget? We think you should also be aware of two excise taxes that can hit you when you purchase certain vehicles. These taxes may be hidden costs that could influence your decision in terms of choosing a vehicle.

The "gas guzzler" tax. This tax is imposed on new cars that fail to meet federal fuel economy standards. Although this tax is imposed on the manufacturer, it becomes part of the retail price. Before computing the depreciation deduction for a business car, you must reduce the basis of the car by the amount of the gas guzzler tax you paid. So, you can't recover the tax through depreciation.

Luxury tax. The other excise tax that applies to some new cars is a 4 percent tax for 2001 on any portion of the sales price of a luxury car that exceeds $38,000. In 2002, the tax is scheduled to decrease to 3 percent, and then it expires in 2003. The dollar threshold above which the tax is imposed is indexed for inflation each year. The tax is collected by car dealers and reported by them to the government.

After-market alterations in the car must be counted as part of the purchase price, if they occur within six months of the purchase and they exceed $1,000.

If you paid luxury tax on a car you purchased this year, the amount of the tax is not deductible. Instead, you should treat it like a sales tax: add it to car's tax basis and recover it through depreciation deductions.

If you purchase a conventional automobile and have it retrofitted to make it an electric or clean-fuel vehicle, the cost of the additional parts and installation will not be subject to the luxury tax. If you purchase a vehicle that was designed to be an electric vehicle, the luxury tax applies only to the portion of the price that exceeds 150 percent of the ordinary luxury tax threshold, or approximately $57,000 for 2001.


Save Money

The luxury car tax does not apply to trucks, vans, and sport-utility vehicles that have a maximum design gross loaded weight over 6,000 pounds. If you bought a qualifying sport-utility vehicle that cost $50,000 in 2001, this special rule would save you $480 ($50,000 - $38,000 x 4%). In addition, if you use this type of vehicle for your business, it also escapes the annual depreciation dollar caps and the annual lease income inclusion rules.