So I had a back and forth with Pat Flynn over twitter on this topic recently so I thought I’d share the details with you all. The content here is courtesy of Russ Wilson at Porte Brown who I asked to give me a more clear version of these provisions than I could offer. Russ is part of my tax advising team. Owning a business (or a practice) has many advantages. People who live in the W2 world have no idea what they are missing (probably better that way). Ever wonder why so many business owners own 6000 pound plus SUVs? After reading this, you will realize that it’s not some strange coincidence or SUV club that they all belong to. Big SUVs have big tax advantages.
Two provisions in the tax law help create the incentive to encourage businesses to buy vehicles and invest in themselves.
- Thanks to the 50 percent first-year bonus depreciation privilege, you can write off the entire business-use percentage of the cost of a NEW “heavy” SUV that is placed in service by December 31, 2014 and used more than 50 percent for business. (Used vehicles do not qualify.)
- Under the Section 179 deduction privilege, you can write off up to $25,000 of the cost of a new or used heavy SUV that is placed in service by the end of your business tax year and used over 50 percent for business. You can then depreciate the rest of the business portion of the SUV’s cost using the normal rules.
To collect these tax breaks, you must buy an SUV with a manufacturer’s gross vehicle weight rating (GVWR) of more than 6,000 pounds. First-year depreciation deductions for lighter SUVs, passenger cars, and light trucks are much smaller. You can usually find a vehicle’s GVWR specification on a label on the inside edge of the driver’s side door where the hinges meet the frame.
Example 1: Your calendar year company buys a NEW $65,000 Cadillac Escalade and uses it 100 percent for business in 2013.
How much depreciation can be claimed for 2013?
Section 179 $25,000
50% bonus $20,000 ($65,000-25,000 * 50%)
Remaining depr 4,000 (remaining MACRS regular depreciation)
Total Depreciation: $49,000 75% of the cost!!!!!!!!!
In contrast, if you spent the same $65,000 on a new sedan, your 2013 depreciation write-off would only be $11,060.
Example 2: Your business uses the calendar year for tax purposes. You buy a used $40,000 Range Rover and use it 100 percent for business between now and December 31. On your 2013 business tax return or form, you can write off $25,000 thanks to the Section 179 deduction privilege. Then you can usually write off another $3,000 under the normal depreciation rules [($40,000 minus $25,000) times .2 equals $3,000]. Your first-year depreciation deductions add up to $28,000 ($25,000 plus $3,000 equals $28,000).
In contrast, if you spent the same $40,000 on a used sedan, your 2012 depreciation write-off would be only $3,060.
****What Vehicles Qualify for the full Section 179 Deduction?
Many vehicles that by their nature are not likely to be used for personal purposes qualify for full Section 179 deduction – NO $25,000 LIMIT including the following vehicles:
- Heavy “non-SUV” vehicles with a cargo area at least six feet in interior length (this area must not be easily accessible from the passenger area.) To give an example, many pickups with full-sized cargo beds will qualify (although some “extended cab” pickups may have beds that are too small to qualify).
- Vehicles that can seat nine-plus passengers behind the driver’s seat (i.e.: Hotel / Airport shuttle vans, etc.).
- Vehicles with: (1) a fully-enclosed driver’s compartment / cargo area, (2) no seating at all behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. In other words, a classic cargo van.
With increased tax rates in 2013, the highest tax rate is 39.6%. If you find yourself in this bracket, a Heavy SUV or other larger vehicle will help save tax dollars if you are in the market for a new vehicle!
By the way, in 2009, bonus depreciation was 100 percent rather than 50 percent. Ask me why I know that 🙂
If you want to talk to someone about these provisions, give Russ a call or drop him an email and refer to this post. I’m sure he would be happy to talk with you further.
Email: [email protected]
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P.S. If you don’t know what depreciation is, it’s something you will learn more about as you continue to read my posts. Ask questions or sign up for my newsletter.