Tax Section 179 deductions for car, truck and SUV

AUTO VEHICLE TAX SAVINGS USING SECTION 179

 

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!

I just received a call from a client from Pennsylvania who wants to get Section 179 write off on vehicle but will fail to get the tax benefits that he expects to get!  I will call this client “John”

Why will he fail?

  1. 1.   Although John is getting a vehicle with over 6000 pounds of curb loaded weight, he is leasing the vehicle personally when he should  have leased it through his S corporation. John will not be able to deduct the Section 179 on a purchase or “lease-purchase” due to the infamous Alternative Minimum Tax.  The Alternative Minimum Tax is triggered when a taxpayer’s tax rate is close to the Alternative Minimum Tax rate and where the taxpayer has a lot of medical, state taxes and employee business expenses.  The Alternative Minimum Tax disallows these deductions and could trigger additional tax. The only way to know whether John is “trapped” in the Alternative Minimum Tax is to run a tax plan calculation. I recommend the calculation is run before entering into a material transaction like getting a new vehicle.
  2.  Auto dealerships love customers to enter into a lease transaction so that they can make money on the financing.  Unfortunately, John did not check whether he entered into a lease rental or a lease purchase.  A lease rental is a lease where the buyout at the end of the lease is the “fair market price” of the vehicle based on a vehicle valuation book like the Kelly Blue Book.   John will not be able to write off the first $25,000 times his business percentage because he has not entered into a lease purchase.  Instead he can only deduct the business percentage of the lease “rental payments”.
  3.   If the lease has a fair market value buyout that is not considered a below market “bargain buyout”, the IRS considers the lease to be an auto rental expense.

 

4.  What if John cannot get the lease purchase or financed cash purchase under his S or C Corporation or partnership?  John should document who he spoke to that would not allow his business to be the owner.  What would be better? If John could get the dealership or the leasing/financing company to give John’s business a “turn down letter”.  However it is unlikely that John will be able to get this letter so an email sent to the auto dealership and financing company would be the next best thing.   Then John should include the email/letter has part of the minutes of the annual meeting explaining that he tried to get the vehicle in the business name, that the vehicle is solely for business purposes except for a few personal miles.

 

5.   Another mistake is when the client fails to get the CPA a copy of the lease rental, lease purchase agreement. Why does the CPA need this document?  To find out if the vehicle is treated as a rental or a purchase.  If the buyout is less than fair market value (i.e. 5% buyout),  the IRS considers the lease to be a “Lease Purchase” and the vehicle is treated  as an asset and can depreciate the vehicle.  The problem is that we want the best tax benefit.  I have seen where clients in a low tax bracket in a current year, buy a vehicle hoping to get a great tax benefit. Unfortunately, Section 179 is only allowed to the extent of taxable income.  For example, John’s S corporation had taxable income of $12,000 and therefore the Section 179 of $25,000 could not be all used. In addition, John was in the low 15% tax bracket so John only saved $1,800 in taxes in the current year. In the next year when John was in the 40% tax bracket, John does not have this large depreciation write off!

 

6. John decides to buy a  heavy Non-SUV  for $36,000 qualifies which happens to have  cargo space interior that exceeds 6 feet! John can write off more than the $25,000 times the business percentage used.

 

7.   So does it make a difference whether it is a rental or a purchase? Let us take this  $36,000 vehicle that weighs over 6000 pounds that was purchased in September.   If there is a fair market value buyout at the end of the lease (say 36 months), the monthly payments (assuming there isn’t any interest being charged) of $1,000 per month would result in a tax deduction of $3,000 (4 months times $1,000 per month times 75% business use).  If however, the buyout has a “bargain purchase” of much less than the fair market value, we have a “PURCHASE”.  John can deduct $36,000 x 75% business use this year or $27,000!!

8.  However, next year, John will continue to get the $1,000 per month write off times 75% business use per month if we have a “RENTAL LEASE” and not a PURCHASE.  If the lease was a PURCHASE, John would get zero depreciation deduction next year.   So, if John is in a lower tax bracket this year and a higher tax bracket next year, John might want to consider waiting until next year to by this vehicle.

 

I hope the article has been useful! Jeffrey Brooks, CPA, CFP, MBA 602-292-200

 

 

 

 

 

 

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com