Nonbusiness Vehicle Criteria
Used for Nonbusiness Purposes
In determining whether a vehicle is used for business or nonbusiness purposes, a COR may rely, subject to the note below, on the registration of such vehicle with the Virginia Department of Motor Vehicles. There are three preponderance of use tests that a COR can use to assist in determining which vehicles are used for nonbusiness purposes, and qualify for tax relief.
Example: A passenger car (not being leased) is registered with the Department of Motor Vehicles in the name of "ABC Auto Club". The registration of the car in the name of the business creates a rebuttable presumption for the COR that the car is being used for business purposes, and is therefore ineligible for tangible personal property tax relief. If the taxpayer disagrees with the COR's determination, he may present documentation to the COR to show that the vehicle should qualify for tax relief.
Note: The "B" and "I" indicators on the DMV file indicate the type of entity owning the vehicle and in no way indicate vehicle use.
Preponderance of Use Test
Only motor vehicles being used for a nonbusiness purpose qualify for the tax relief provided for under the Personal Property Tax Relief Act. A vehicle is used for a nonbusiness purpose when the preponderance of its use is for other than business purposes. The "preponderance of use test" for other than business purposes will be met if the vehicle is used for trade or business purposes 50% or less of the time. The preponderance of use test will not be deemed satisfied if one of the three tests listed below is satisfied.
Generally, expenses for business use of a personal motor vehicle are reported on forms attached to federal income tax returns. Sole proprietors report expenses on Schedule C, farmers on Schedule F, and employees using their motor vehicle in connection with their employer's trade or business on Form 2106. Depreciation is normally reported on Form 4562 and carried over to the other schedules and forms.
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. Section 179 allows taxpayers to expense the cost of motor vehicles on their federal income tax return 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 the Commonwealth's personal property tax relief program if it is expensed under Internal Revenue Code 179 because vehicles expensed under 179 are business use, not personal use, vehicles. However, 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 , the Internal Revenue Code 179 requires taxpayers to repay any tax deductions taken on the vehicle. If a taxpayer must repay these 179 deductions, his vehicle may qualify for the Commonwealth's personal property tax relief program because the vehicle may be a personal use, as opposed to business use, vehicle. In years subsequent to the MACRS recovery period, the business/nonbusiness use of the motor vehicle for the purposes of car tax relief will be determined based on the mileage test criteria.
- Bob Brown purchases a panel truck that he uses in his pizza delivery business. On his federal tax return for the year the panel truck was purchased, Bob elects to take a deduction for the cost of the panel truck under Internal Revenue Code 179. The vehicle is used for a business purpose the majority of the time, and the panel truck does not qualify for the Commonwealth's personal property tax relief program.
- In April of the next year, Bob Brown closes his pizza delivery business. For the rest of the year, Bob only uses the panel truck for nonbusiness purposes. Bob drives the panel truck a total of 10,000 miles, of which 4,000 miles (i.e., 40%) were in the course of his business. Because the panel truck is used for a nonbusiness purpose a majority of the time (60%) it is eligible for personal property tax relief the following year.
Under certain circumstances, a taxpayer may deduct the depreciation costs of a motor vehicle under federal Internal Revenue Code 168. Generally, the depreciation deduction is allowed if the vehicle is used in a trade or business, or to produce an income.
If a taxpayer uses a motor vehicle for both business and nonbusiness purposes, he cannot deduct the full amount of the depreciation costs under 168. The taxpayer may deduct depreciation costs only for the business use of the vehicle.* If the taxpayer uses the vehicle more than 50% of the time for business purposes, the vehicle will not qualify for Virginia's personal property tax relief program.
Once the vehicle has been fully depreciated under 168, the business/nonbusiness use of the motor vehicle will be determined based on the mileage test (link to Mileage Test) criteria.
On June 1, 1998, Mark Jones buys a $20,000 pickup truck to be used in his real estate business as well as for his personal use. Mark elects to use the half-year convention in computing his depreciation expense. During 1998, Mark used the pickup truck 40% of the time in the course of his business. In succeeding years, Mark's business use is 70% in 1999, 75% in 2000, 60% in 2001, 80% in 2002, and 30% in 2003.
In 1998 and 2003, the vehicle is used less than 50% for business purposes; therefore, it would be fully eligible for tangible personal property tax relief in those two years. In 1999 through 2002, the vehicle is used more than 50% for business purposes; therefore, it would not qualify for tangible personal property tax relief in those years.
*In calculating the federal depreciation costs tax deduction under 168, the taxpayer must determine what percent of the time he used the vehicle for business purposes.
Mileage Test Criteria
When taxpayers use their vehicles for business purposes either in connection with their own trade or business or that of their employer, they may be eligible for a federal tax deduction or reimbursement from their employer. In either case, if the annual business mileage of the motor vehicle exceeds 50% of the overall annual mileage, the vehicle will not qualify for tax relief under Virginia's personal property tax relief program. Vehicles used for business purposes are business use, not personal use, vehicles, and, therefore, do not qualify. For purposes of the mileage test, the ratio will be rounded to the nearest one tenth of one percent (three decimal places).