Q:

I am a self employed, Realtor.  I purchased a SUV last July, 2004.  It weighs more than 6000 pounds.  When I first discovered Section 179 I also read that you receive 35% the purchase price back as depreciation.  Can you instruct me as what exactly to inform my CPA when doing my taxes this year? 

 

I would appreciate any advice you have for me.

 

Thank you,

 

PS  Did I also read somewhere that you can deduct more that 50% of meals this year?  I thought I read was increase to 60%???

A:

I'm not sure if I'm understanding what you are asking me.  Do you actually want me to tell you how to calculate the depreciation and Section 179 deductions on your new SUV so that you can pass that along to your CPA?  If that's the case, you really should be looking for a new tax preparer because these are very basic calculations that have been around for decades.

The 35% figure you are mentioning sounds like a rough guesstimate of how much tax you would save from the deduction of the SUV purchase.  Many people do make the erroneous assumption that every dollar deducted on a tax return results in a dollar for dollar tax saving.  That might be the case if the effective marginal tax rates were 100%.  However, the actual tax savings from a deduction is lower than 100% and is based on your personal effective tax rates.  What I have frequently seen, when counting Federal and State income tax rates, plus the 15.3% self employment tax, an effective combined tax rate of over 50%.  This would mean that deducting $40,000 for the purchase of an SUV would reduce your taxes by around $20,000 for that year.

When setting up the new SUV on your depreciation schedule, there are a number of possible ways to claim the expense, which your tax preparer can work out to the best advantage for you.  There is the Section 179 expensing election.  There is also a possible 50% bonus depreciation as long as you were the first purchaser of the SUV, and there is normal depreciation, which can be computed using either the straight line or accelerated methods. 

So in regard to what you need to provide your tax preparer for your 2004 returns, I would start with a copy of the purchase invoice. That will provide him with the date purchased, its cost, any trade-in info, whether the vehicle was new or used, and how it was financed (cash and/or loan).  You also need to provide him with the total number of miles you drove the SUV during 2004, as well as how many of them were for your real estate business.  If you are going to be claiming the Sec. 179 or bonus depreciation, you will be using the actual cost method of calculating that vehicle's expense instead of the standard mileage rate.  This means that you will also need to provide him with all of the vehicle's operating costs for 2004, including fuel, repairs, insurance, registration, washing, and interest on the loan, if you didn't pay cash for it. 

Be sure to provide the totals for these costs.  Your preparer will apply the business usage percentage against them.  A common mistake I find some of my clients making is self reducing the vehicle expenses they report to me.  For example, if their business usage was 80%, they only report 80% of their costs to me.  Unless I catch that, our tax program will multiply the total costs we enter by 80%.  This ends up giving them a deduction of only 64% (80% X 80%).

In regard to the deduction for business meals, it is still 50% for most businesses, including Realtors.  The allowance is 70% only for some kinds of transportation workers, such as pilots, truck drivers and railroad worker.  There is always talk about increasing it for the rest of us, especially when the restaurant business is slow; but nothing new has made it into law. 

Again, just as with the vehicle costs issue I mentioned above, tell your tax preparer the total you spent and his tax program will reduce that by the 50%.  I occasionally discover clients thinking they are helping me out by only entering 50% of their business meals and entertainment costs in their organizers.  If I don't catch what they've done, their actual deduction will be only 25% (50% X 50%) of their actual costs because my tax prep program reduces whatever I enter by 50%.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up Q:

Thank you for your response.  I was under the assumption that you deduct the entire amount of purchase price from your gross income.  (ie: gross income 100,000 SUV 50,000 then I only owe taxes on the remaining 50,000 of which all expenses (meals, dues, cell phone, advertising etc) and depreciation would apply.  What kind of mileage log is needed.  Mine is very generic, as my past tax preparer only asked for total miles per month.

What is your charge for tax preparation?

Thank you,

A:

It's not quite that straight forward.  Your business vehicle expenses will go on your Schedule C. along with your Realtor income and other related business expenses.

There are several ways to keep records of business driving that will satisfy IRS requirements.  At a bare minimum, you need to record the odometer at the end of each year so that you can document how many miles the vehicle was used for that year.  Then, you can either back out the purely personal miles to arrive at the business total or you can total up the business miles for the year.  This can be done either trip by trip or by the average method; such as average number of business miles per day (or week or month) multiplied by the number of days (or weeks or months) worked in the year.  Use whichever method fits you best.

We are not currently accepting any new tax clients and are in fact still trimming back on the ones we have to arrive at a level that I can better handle.  You can see my tips on selecting a preparer here on my web site.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/04/2005 09:36:00 PM Send this post: