Can I Write Off a Business Vehicle?

Now is the perfect time to reduce your taxes and enjoy a new vehicle.  Most clients believe that you must buy a new vehicle to get the fast and high big tax deductions through depreciation of section 179 and bonus depreciation. But this isn’t true. You just need to be the first owner (other than the dealer) to be eligible to get the additional bonus depreciation. The vehicle has to weigh over 6000 pounds to really get the tax benefits that you need reduce your taxes?
 
Did you know that even if you buy a used vehicle that you still can get section 179 if the vehicle ways over 6000 pounds up to $25,000 times business percentage the vehicle is used? 
 
What if you wait and you buy vehicle on December 31 but the vehicle is not ready to be picked up until January 2?  When this happens you do not get  the depreciation write off in the current year 2013.
 
So you must not only place the vehicle in  service in 2013 but you  also must be the owner of the vehicle and not just the lease of the vehicle  to take the depreciation in the current year.
 
What if you buy a $85,000 SUV? What kind of depreciation do you get on this vehicle in year one?  You’re allowed to write off  up to $56, 500 of depreciation in the current year!
 
Most of the depreciation comes from bonus depreciation on a “new” vehicle over 6000 pounds and up to $25,000 times business percentage comes from Section 179.
 
When I was 21 years of age and a junior (I mean really  Junior inexperienced tax accountant) with a CPA firm, my boss was drunk so I was sent  to represent his  doctor client who had purchased a vehicle for a lot of money on December 31.  The IRS was questioning the taking of investment tax credit.
 
We had taken the full  investment tax credit which was allowed back then on 100 % business use because the government was trying to help the auto industry that was losing out to Japan.
 
The IRS agent was a man  in his 60s who was just being friendly and talking about what the doctor enjoyed doing in his free time and what were his personal interests.   The IRS agent said “by the way when you picked up your new car on December 31 did you have fun with it, where did you go?”  The doctor bragged “I drove my new car to show all my  friends my beautiful new car and then I took a couple of them over to the driving range to play golf.”
 
The doctor client lost the entire investment tax credit because the vehicle was not used for business purpose on December 31st.  In addition the doctor client (I am sure he was soon a former client) owed income tax, underpayment of estimated tax, interest and penalties!
 
 
What are the lessons from the this true story? 
 
 
1. Always have an experienced CPA coach you before meeting with the IRS.
2. Don’t let the client talk informally with the IRS. Tell the client to act like he is in front of an adversary giving a recorded deposition and
3. Work during the year to find ways  for you to get to as close to 100% business use as possible by documenting business mileage.
4. When you sign a lease, be careful that you know what kind of lease your signing. Are you signing a lease rental where after couple years you have to pay for  the fair market value to buy the lease out? If so,  you do not have a purchase and you’re not allowed to write off a large amount of depreciation  in year one.
 
Let  me give you another example: Before midnight on December 31, 2013, you buy and place in service a $50,000 qualifying SUV for which you can claim 90 percent business use. Your business cost is $45,000 (90 percent times $50,000). Your maximum write-off for 2013 is either $37,000 or $35,500, computed as:
 
$25,000 in Section 179 expensing,  $10,000 in bonus depreciation, $2,000 in MACRS depreciation (or $500 if the mid-quarter convention applies because you placed more than 40 percent of your assets in service in the last quarter of the year)
 
What if you Like to buy a Used SUV or Crossover Vehicle
 
 
The  used SUV or crossover vehicle with a GVWR of 6,001 pounds or more does not qualify for bonus depreciation. Bonus depreciation on vehicles applies to “new” (remember demonstration models are considered new)  vehicles only.  What is considered a new vehicle? A vehicle where you are the first owner other than the dealership.
 
That said, you can still get a big deduction because the used qualifying SUV or crossover vehicle qualifies for Section 179 expensing of up to $25,000 on the business cost.
 
And then, on top of the $25,000, you deduct either 20 percent or 5 percent MACRS depreciation. As we mentioned above, the 5 percent applies when you place in service more than 40 percent of your personal property assets in the last three months of your taxable year.

 
If you buy a New or Used Pickup
 
 
If you or your corporation buys and places in service before midnight on December 31, 2013,. To qualify for Section 179 expensing, the pickup truck must have:
 
 
a GVWR of more than 6,000 pounds; and
 
a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.
 
 
Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, it is considered an SUV. That’s not bad. It’s still eligible for expensing of up to $25,000, and if it’s new, it’s also eligible for bonus depreciation.
 
 
In addition to the luxury limited depreciation, you or your corporation can claim up to $8,000 in bonus depreciation on a new car purchased and placed in service before midnight on December 31, 2013.
 
Here’s how this works: You add the $8,000 in bonus depreciation to the $3,160 luxury limit, for a 2013 limit of $11,160. To get to this limit, you can use a combination of Section 179 expensing and depreciation. You reduce the $11,160 limit by personal use.

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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