Attention all taxpayers filing use tax returns for vehicles: significant changes to the depreciation rates for out-of-state use of motor vehicles came into effect starting July 1, 2024. This article provides a detailed explanation of these changes and how they will impact your tax filings at the beginning of the new year.
Understanding the Illinois Use Tax Act
The Illinois Use Tax Act allows taxpayers to claim a reasonable allowance for depreciation on items purchased from a retailer, acquired and used outside Illinois before being brought into the state for titling and registration. This provision, found in 35 ILCS 105/3-10, applies to various items, including motor vehicles. If you have any questions about the Illinois Use Tax Act, JLW Tax & Bookkeeping is here to help you understand it better.
Current Depreciation Rules (Up to June 30, 2024)
For motor vehicles brought into Illinois on or before June 30, 2024, the depreciation rules are as follows:
- The presumed average life expectancy of the motor vehicle is 50 months.
- The depreciation rate is set at 2 percent (0.02) for each whole month of out-of-state use.
To calculate the depreciation, you take the number of whole months the vehicle was used out-of-state and multiply it by the depreciation rate of 2 percent. For example, if a vehicle were used outside Illinois for eight whole months, the depreciation rate would be 16 percent (8 months x 2 percent per month). See 86 Ill. Adm. Code 150.110
New Depreciation Rules (Effective July 1, 2024)
Starting July 1, 2024, new rules will apply for motor vehicles brought into Illinois:
- The presumed average life expectancy of the motor vehicle is increased to 60 months.
- The depreciation rate is adjusted to 1.67 percent (0.0167) for each whole month of out-of-state use.
The new depreciation calculation will involve multiplying the number of whole months the vehicle was used out-of-state by the new depreciation rate of 1.67 percent. For instance, if a vehicle is used outside Illinois for eight whole months, the depreciation rate would be 13.36 percent (8 months x 1.67 percent per month).
Applying the New Depreciation Rates
Taxpayers must use these updated rates when calculating depreciation for out-of-state use on the following use tax returns:
- RUT-25, Vehicle Use Tax Transaction Return
- RUT-25-X, Amended Vehicle Use Tax Transaction Return
- RUT-25-LSE, Use Tax Return for Lease Transactions
- RUT-25-LSE-X, Amended Use Tax Return for Lease Transactions
It is crucial to accurately apply the appropriate depreciation rate based on the date the vehicle is brought into Illinois. Failure to do so could result in incorrect tax calculations and potential issues with the Illinois Department of Revenue.
Example Scenarios
To help illustrate the application of these rules, consider the following examples:
Example 1: Vehicle Brought into Illinois Before July 1, 2024
- A taxpayer purchases a vehicle and uses it out-of-state for 12 months before bringing it into Illinois on June 1, 2024.
- The depreciation rate is 2 percent per month.
- Depreciation calculation: 12 months x 2 percent = 24 percent.
- The taxpayer can claim a 24 percent depreciation allowance on the use tax return.
Example 2: Vehicle Brought into Illinois on or After July 1, 2024
- A taxpayer purchases a vehicle and uses it out-of-state for 12 months before bringing it into Illinois on August 1, 2024.
- The new depreciation rate is 1.67 percent per month.
- Depreciation calculation: 12 months x 1.67 percent = 20.04 percent.
- The taxpayer can claim a 20.04 percent depreciation allowance on the use tax return.
Updated Form Instructions
For more detailed information on how to properly claim depreciation for out-of-state use on one of the tax forms listed above, please refer to the updated form instructions available on the Illinois Department of Revenue website at tax.illinois.gov. These instructions provide step-by-step guidance on completing your use tax returns accurately and efficiently.
Final Thoughts
Understanding and applying the correct depreciation rates for out-of-state motor vehicle use is essential for all taxpayers filing use tax returns. The changes, effective July 1, 2024, reflect an adjustment to the presumed average life expectancy and the monthly depreciation rate, which impacts the calculation of the depreciation allowance.
By staying informed and following the updated guidelines, taxpayers can ensure they comply with the Illinois Use Tax Act and avoid potential issues with their tax filings. For any additional questions or clarification, you can reach out to the Illinois Department of Revenue or consult a tax professional.
Remember, proper care and attention to detail in your tax filings can save you time and money, helping you avoid unnecessary complications and ensuring that you are taking full advantage of the depreciation allowances available under the law.
For professional guidance and tax assistance, call 217.679.1872 or contact JLW Tax & Bookkeeping Services today!
