2010 Vehicle Depreciation Limits

CCH has calculated the inflation adjustments for the depreciation limits on business vehicles first placed into service in 2010.  Based on past experience, they expect IRS to release their official version of the calculation in April 2010.

Ever since the ridiculously low luxury car limits on depreciation were initiated in 1984, we have had to break the news to clients that they were driving luxury cars in the eyes of the IRS, even though that wasn’t reflected in reality.

The new limits per CCH:

Passenger Vehicles:

Year 1                            $3,060
Year 2                              4,900
Year 3                              2,950
Year 4                              1,775
Year 5                              1,775
    Five Year Total         $14,460

Trucks & Vans:

Year 1                       $3,160
Year 2                         5,100
Year 3                         3,050
Year 4                         1,875
Year 5                         1,875
    Five Year Total    $15,060

 

Labels: 4562, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/19/2009 12:18:00 PM Send this post:

 
Sec. 179 For Yachts?

Another question that really depends on multiple factors.

YouTube page.

 

 

 

 

Labels: 179, Vehicles, video

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/10/2009 09:42:00 PM Send this post:

 
Maximum Sec. 179 For Vehicles - VidCast

It’s not a cut and dried answer as to the maximum that can be claimed, as I explain in this vidcast Q&A.

If the embedded player doesn’t work, you can access the video directly on YouTube.

 

 

 

Labels: 179, Vehicles, video

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/08/2009 05:41:00 PM Send this post:

 
Financing an SUV For an LLC - VidCast
We have been looking at ways in which to improve the quality of our content; so we are adding short videos (VidCasts) of my answering reader questions.  These should be more enlightening than the completely text versions. 

This is going to be an evolving process as we become more proficient in utilizing this medium and our skills with the software and equipment improve.  Our goal as of now is to do the same kind of Q&As as I have been posting for several years on my blog in these free short YouTube videos.  

As we become more comfortable with this technology, we also plan to present some more intense live online webinars on some of the topics that seem to have the most interest around the country. There will be a charge for these to cover the costs, as well as for our time.  As charitable as we are, we are evil capitalists and do intend to make a profit on this venture.  The mini-classes will be of particular interest to small business owners and investors who are interested in learning techniques on how to minimize their taxes, as well as professional tax advisors with whom I can share my 34 plus years of experience.  The costs will be very reasonable and much less than the $250 per hour that clients are paying me for one on one consulting.   

This first batch of VidCasts that we produced are rough as we learn how to operate everything; but the information they contain should be useful for anyone wanting to keep their taxes down.

If the embedded player doesn't work in your browser, you can go directly to the YouTube page to watch it.

  

 

 

Labels: LLC, Vehicles, video

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/07/2009 07:55:00 PM Send this post:

 
Recording Mileage

I would be very interested in hearing from anyone who uses this new app as to how accurate and convenient it is in real life usage.

Labels: gadgets, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/20/2009 11:42:00 AM Send this post:

 
Double Depreciating Vehicles?

Q:

Subject: Question about Section 179 Deduction

I was reading your website and had a question about section 179.

In 2007 I purchased an Expedition EL >6000 lbs. I took the $25,000 deduction, I am being audited and am being told that I can not take the milage deduction and the 179 deduction. I thought the 179 was a depreciation event and had nothing to do with deducting milage. Can you elaborate??

Thanks in advance

A:

I constantly warn people about the dangers of trying to prepare their own tax returns because it is all too easy to make simple mistakes such as the one you did.

With business vehicles, you generally have the option of claiming the IRS's standard per mile deduction or the prorated actual expenses based on business miles to total miles for the year.

The standard mileage rate includes a factor for straight line depreciation. This was 19 cents per mile for 2007.

The Section 179 expensing election is basically a kind of very accelerated depreciation. If you claim it, you are required to use the actual expense method for that vehicle and you are not allowed to use the standard mileage rate ever for that particular vehicle because that would result in double deducting the same depreciation.

There is no nice way to say this; but you screwed things up big time by trying to deduct both Section 179 and the standard mileage rate on the same vehicle. Any professional tax preparer with even limited experience would know better than to do that.

With that kind of basic error in your tax return, there's no telling what others you have as well, including many that probably cost you money. Before you go any further with the IRS auditor, you should hire a professional tax advisor to review your 2007 1040 and see if s/he can find some tax saving deductions that will offset the extra taxes that you are going to have to pay as a result of double deducting vehicle depreciation.

If you already prepared your own 2008 1040, you will also need to have a professional tax advisor fix the mistakes that it has.

I'm sorry to be the bearer of such bad news and I hope this helps you salvage some tax savings.

Kerry Kerstetter

Follow-Up:

Thanks for the quick response. The situation is not quite so bad, we found almost $20k in deductions missed.

Thanks again for your help

Labels: 179, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/03/2009 09:52:00 PM Send this post:

 
Sec. 179 vs. Standard Mileage Rate

Q:

Subject:  Re: section 179

Hi,

Thanks for your previous replies in the past. If you take a section 179 deduction can you still deduct  your businees mileage. O does the section 179 deuction fall under the itemised deductions therefore precluding mileage claims?

thanks

A:

You really need to be working with a professional tax advisor because you are mixing up different tax issues that are technically not connected.

As I have explained on several occasions, if you use Section 179 or any other accelerated method of depreciating a vehicle, you are required to use the actual cost method of calculating deductible vehicle expenses for that particular vehicle for as long as you own it.  You are not allowed to switch to the IRS's standard per mile rate because that rate includes a portion for deprecation and to switch to it would end up giving you double deductions for deprecation.

The issue of the standard personal deduction versus Schedule A itemized deductions is completely separate from the issue of how the vehicle costs are calculated.  As always, it's generally a good idea to keep track of all of your actual itemized deductions and use them on Schedule A if they are higher then the standard personal deduction.

I hope this helps; but you need to be working with a tax professional.

Good luck.

Kerry Kerstetter

 

Follow-Up:

Hi,

Thanks a lot.

 

 

Labels: 179, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/19/2009 08:30:00 PM Send this post:

 
Vehicles qualifying for maximum Section 179

From a client with a 3/31/09 corp year-end:

Dear Kerry:

Our corp is considering purchasing a van such as a delivery van (GMC, Chevy, etc.). 

Could you please inform me of the IRS specifications that must be met to allow us to expense the entire amount.

Before we would purchase the vehicle I will check with you to make sure it meets the requirements.

Thanks.

My reply:

As you requested, here are the specifications for what a vehicle has to have in order to qualify for deducting all of its cost in the first year. Basically, these rules are most important if a vehicle either weighs less than 6,000 pounds or costs less than $25,000.

I excerpted this from my main tax reference source, TheTaxBook. Section 280F is the part of the tax code that severely limits the deprecation deduction for vehicles.

Vehicles not subject to Section 280F. The following vehicles are not subject to the depreciation limitations under Section 280F or any of the other listed property rules:
• Clearly marked police and fire vehicles.
• Unmarked vehicles used by law enforcement officers if the use is officially authorized.
• Ambulances used as such and hearses used as such.
• Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo.
• Bucket trucks (cherry pickers), cement mixers, dump trucks, garbage trucks, flatbed trucks, and refrigerated trucks.
• Combines, cranes and derricks, and forklifts.
• Qualified specialized utility repair trucks.
• Tractors and other special purpose farm vehicles.
• A vehicle used directly in the business of transporting persons or property for pay or hire, including school buses, and other buses with a capacity of at least 20 passengers.
• A truck or van that is a qualified nonpersonal-use vehicle.

Qualified nonpersonal-use vehicles.
These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. They include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company’s name. Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat, are qualified nonpersonal-use vehicles.

Trucks and vans.
Trucks and vans are passenger autos built on a truck chassis, including minivans and sport utility vehicles (SUVs) that are built on a truck chassis. They have the same definition as passenger autos, except that instead of unloaded gross vehicle weight, the definition is gross vehicle weight not more than 6,000 pounds. The Section 280F depreciation limits for trucks and vans are higher than the limit for cars.

Vehicles over 6,000 pounds.
Passenger autos rated at more than 6,000 pounds unloaded gross vehicle weight, or trucks and vans rated at more than 6,000 pounds loaded gross vehicle weight are not subject to the Section 280F depreciation limits. However, such vehicles may still be considered listed property for purposes of the other listed property rules, including the requirement that the vehicle be used more than 50% for business to take the Section 179 deduction.


Remember that the expensing deduction is only allowed if you actually place the vehicle into service before the end of your tax year. It won't be sufficient to prepay for it by March 31 and then take delivery later in your next fiscal year. You need to actually use it before the end of the day on March 31 in order to claim it on this year's tax return.

I hope this helps. Let me know if you have any specific questions.

Kerry

Follow-up:

Kerry:

Could you please let me me know if any or all of the following vehicles qualify for deducting all of the cost in the first year.

1)  2009 GMC Sierra 2500 crew cab pickup.  GVWR = 9600 lbs.  Bed length = 77 inches.  This is the same model we purchased nd were able to deduct in 2006.  Price = $39,480

2)  2009 GMC Savanna 12 passenger van.  GVWR = 9600 lbs.  The seats can be removed.  Price = $33,027

3)  The dealer also has the same model 2008 GMC Savanna available for about $21,000

Thanks.

My Reply:

I looked over the vehicle descriptions you faxed over and compared them to the rules for the first year expensing.

1.  Because the 2009 GMC Sierra has an exterior bed of larger than 72 inches, it would qualify for deducting the entire purchase price of $39,480 plus the sales tax.

2.  Because the 2009 GMC Savanna has seats for so many people, it would only qualify for a first year deduction of $25,000 of its purchase price.  The remaining cost would be depreciated over five years.

3.  Because the 2008 GMC Savanna costs less than the $25,000 limit, its entire $21,000 purchase price plus sales tax could be expensed in the first year.

Besides the fact that the vehicle needs to be actually placed into service before the end of 3/31/09, which I mentioned last time, another important point is that the dollar figure we are working with is after deducting any trade in value the dealer may give you if you are swapping another vehicle for the new one.  For example, with vehicle number 1 above, if you are receiving a trade in credit of $10,000, only the net cost of $29,480 will be available to deduct in the first year.

I hope this is clear and not too confusing.  Let me know if you have any more questions.

Kerry

 

 

Labels: 179, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/09/2009 07:40:00 PM Send this post:

 
Vehicles exempt from luxury car rules...

We frequently discuss the 6,000 pound exemption from the luxury car depreciation limits that have been around since 1984.

There has recently been some confusion regarding whether the vehicle needs to be constructed on a truck chassis to qualify for the exemption. According to this analysis from CCH, that distinction regarding the chassis may have been removed by IRS.

The IRS announced the applicable 2008 luxury car depreciation caps in Rev. Proc. 2008-22, I.R.B. 2008-12, 658. For the first time since the release of Rev. Proc. 2003-75, the language indicating that an SUV should be considered to be a truck if it was built on a truck chassis was omitted.

In an informal response to a CCH inquiry, the IRS indicated that the language in Rev. Proc. 2003-75 (and the subsequent annual depreciation cap update) was only intended to represent a safe harbor that taxpayers could use to determine whether an SUV qualifies for the higher depreciation caps that apply to trucks and vans with a GVWR of 6000 pounds or less. The IRS either has or will eliminate language in its publications and form instructions that equate an SUV to a truck if it is built on a truck chassis.

Since I have noticed that CCH news stories have a tendency to disappear from their website after a few weeks, I made a PDF copy of this one that you can download.

Labels: Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/12/2008 07:15:00 PM Send this post:

 
2009 IRS Mileage Rates

From the IRS website:

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 
  
  55 cents per mile for business miles driven


• 
  
  24 cents per mile driven for medical or moving purposes


• 
  
  14 cents per mile driven in service of charitable organizations

As described in Revenue Procedure 2008–72, the depreciation portion of the standard rate is 21 cents per mile for 2008 and 2009.  This is useful info for calculating depreciation recapture on vehicles that are sold after using the standard rate. 

Labels: Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/25/2008 02:49:00 PM Send this post:

 
Tips on Donating Your Car
Here is a short video with Tom Herman of the WSJ discussing the rules for claiming a deduction for a donated vehicle.

After all of these years reading Tom Herman's columns in the WSJ, this is the first time I have seen what he actually looks like.

Over the years, I have discussed this topic several times and the biggest misconception seems to be with the term Fair Market Value. Even Mr. Herman glosses over this point in this video.

Most people assume that the Kelley Blue Book value is gospel as establishing a vehicle's value. The truth is that the only true determination of an item's worth is what it will actually fetch on the open market, as per this definition from all over the web.

The price that an interested but not desperate buyer would be willing to pay and an interested but not desperate seller would be willing to accept on the open market assuming a reasonable period of time for an agreement to arise.

That is why the relatively recent IRS rule requiring people to use the charity's actual sales price of the vehicle for the charitable deduction makes a lot of sense. That isn't something you ever see me say very often; IRS doing something that makes sense.

I don't follow used car prices or track what Kelley Blue Book has been doing in response to the higher fuel prices. However, if they haven't dropped values of gas hogs to reflect their decreases in the real world, that is no excuse to consider the Blue Book prices as Fair Market Value.





Update:

A day after posting this, I sent the following to a client:

We received your 2007 personal tax organizer and other docs. I've
looked them over and the only item that is obviously incomplete has to do with the Jeep you donated to St. Vincent de Paul (SVP).

I see that you wrote $2,000 in the organizer as the value, but that won't be enough documentation. As the letter from SVP says, you need to have a 1098-C from them showing how much they actually sold the vehicle for if you are going to claim a value of more than $500. I didn't see a 1098-C among the documents that you sent in. Please contact SVP to obtain a new copy of that form or else we will have to stick with a deduction of just $500.

To help you understand more about this issue, I have attached a copy of the page from The TaxBook, my main tax reference book with the section on vehicle donations circled in red. Please look it over and see how your situation matches up with the examples shown.

Also, just by coincidence, I recently posted an entry on my blog, with a video from the WSJ, on exactly this subject.

Thanks for you help with this. Let me know if you would like to set up a phone appointment to discuss the details of this in more depth.

Kerry

The client wrote back:

I don't have any such documentation. In that case, I'll go ahead and claim $500.

Thanks,

Labels: Charity, Vehicles, video

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/13/2008 11:56:00 AM Send this post:

 
IRS Increases Mileage Rates

At last, IRS has realized that the 50.5 cents per mile standard rate for business miles is woefully out of kilter with the current fuel prices, so they just announced that as of July 1, 2008, the rate will jump by eight cents to 58.5 cents per business mile.

The standard deduction for medical and moving costs will also increase as of July 1, to a whopping 27.0 cents per mile.

And, as always, the rate for using a vehicle for charitable purposes will remain at the statutory limit of 14.0 cents per mile because our imperial rulers locked that rate into the law.

This shows once again why it is important to keep track of actual expenses rather than rely on the out-dated standard rates when calculating vehicle deductions. 

 

Labels: Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/23/2008 03:58:00 PM Send this post:

 
Documenting vehicle weight...

Q:

Subject: Section 179 & Toyota Highlanda Hybrid, GVWR 6150 lbs

Tax Guru,

I've come across an interesting situation. The 2008 Toyota Highlander Hybrid has a sticker/plate inside the drivers side door that states the GVWR as 6150 lbs. However, all the marketing brochures and even Toyota's web site lists the GVWR as 6000lbs. We're thinking of buying this SUV for our small business and want to understand if it qualifies under Section 179.
The plate on the SUV would seem to indicate it does but all other posted information seems to indicate it doesn't.

Any advice?

Thanks.

A:

You really need to be discussing this with your own personal professional tax advisor. However, I am willing to explain how I would address this if it were with one of my clients.

I am guessing that the discrepancy in the listed weights may have something to do with some optional equipment that was installed on the vehicle with that ID plate. The promotional literature from Toyota most likely deals with the standard vehicle before the addition of any optional equipment.

I've mentioned on several occasions how some auto dealers actually offer "tax deductibility" add-on packages of options that take an under 6,000 vehicle into the over 6,000 pound qualifying area. This is why feeling limited to the weights shown on promotional literature is not appropriate.

If, as it seems, you are nervous about IRS possibly disallowing your larger Section 179 deduction for a vehicle over 6,000 pounds, I would go the extra mile in documenting the legitimacy up front. As I've mentioned on numerous occasions, one of the main reasons I am opposed to electronic tax returns is the inability to include additional documentation of potentially questionable items. This is a perfect example.

In your case here, I would take a photograph of the ID plate indicating the GVW of 6,150 pounds and attach it to the tax return where you are claiming that Section 179 deduction. I can't imagine any IRS auditor wanting to quibble over that being wrong. If anything, you may be questioned about your business usage of the SUV; but I can't see the weight being an issue of contention if you have that photo attached.

Again, you should run this by your own professional tax advisor.

Good luck.

Kerry Kerstetter

Labels: Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/23/2008 07:42:00 PM Send this post:

 
Business Mileage

Q:

Kerry,

 

What percentage of business miles vs the total can I deduct per car?

 

A:

There is no such thing as a standard business use percentage.  It depends on how many business miles were driven for each individual vehicle.

As I said before, you need to calculate the business miles in such a way that you would feel comfortable defending that if IRS were to ever question it.

A very commonly used method for reconstructing annual mileage is to estimate the business miles in a standard day or week and extrapolate that for the entire year based on the number of days or weeks you worked that year.  This methodology is accepted by most IRS auditors.

I hate to be such a pain with this; but I can't just pull numbers and percentages out of the air for you. That is your responsibility.

Kerry

 

 

Labels: Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2008 11:50:00 AM Send this post:

 
Driving through the tax maze unescorted...

Q:

Subject: Question submission

 

Hi Kerry,

 

I asked a while ago and am still trying to understand the implications.  I wonder if you could help out.

 

In August, 2004 I purchase a 2004 Chevy Suburban for business use and depreciated the entire ~$48,000 cost under sec. 179 that year.

 

It's now 3.5 years later and I'd like to know the tax ramifications of trading in the 2004 Suburban for a 2008 Suburban (cost ~$54,000).

 

I understand that right now the cost basis of the 2004 chevy is $0.

 

Given that taxes and depreciation are not my strong suit, can you explain what the tax consequences are for such a transaction?

 

Specifically, how much of the new vehicle will be available to depreciate, and can it be depreciated all in a single year (2008)? 

 

With that information, I can understand the real (net) cost (that is, for example, if the trade-in value of the 2004 chevy is $30,000, leaving me paying $24,000 in cash for the new 2008, but if I can depreciate all of that, then my post-tax dollars cost will be somewhere in the $14,000 range (40% taxes) -- do I understand this correctly)?

 

Thank you,

A:

I have already discussed this exact thing in several previous posts; so I am not going to give as detailed an answer as I have already done.

Basically, the additional price you pay for the new vehicle after the trade-in credit is what will be eligible for depreciation and Section 179 expensing.  In your example, that would be the $24,000.

As always, the amount of Section 179 you will be able to claim will be based on the business mileage percentage for the year, your net earned income, and the total amount of new qualifying property you acquire during the year.

In regard to the actual after tax cost of the new vehicle, that will depend on your marginal tax bracket, as well as whether your income is subject to the 15.3% SE tax.  You didn't say where you will be deducting the vehicle costs, such as on Schedule A for W-2 employee expenses or on Schedule C for a sole proprietorship.  The actual tax savings will be dramatically different for each schedule. 

If you are deducting your vehicle costs on Schedule A, you will also have to deal with the Insane AMT, which severely penalizes people with high Schedule A deductions.  A reduction in your regular income tax could be more than offset by the AMT.

If a certain level of tax savings is a critical component in your decision to go through with the Suburban trade, the only smart approach would be to have your personal professional tax advisor run your pro forma numbers for whichever year you are considering the trade under both assumptions; with the new Suburban and keeping the old one.

If, as I suspect, you don't have a personal professional tax advisor, trying to answer this critical question by asking strangers on the internet for help is a dangerous way to handle this. 

Good luck.  I hope this helps.

Kerry Kerstetter

 

  

Labels: Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/19/2007 11:36:00 AM Send this post:

 
Planning to buy Hummer

Q-1:

Subject: Vehicle Tax Deduction

Mary,

 

Can you tell me what the changes to the deductions for vehicles are after this year?  I am considering buying an 2008 Hummer H2 and am wondering if I will be able to use the accelerated tax deduction for tax year 2008 or if I need to purchase by the end of the year?

 

Thank you,

A-1:

There's nobody named Mary here, so I'll handle this.

There are no big changes in the vehicle deductions scheduled for 2008 other than the inflation adjustment of the overall Section 179 maximum and the possibly new amounts for depreciation deductions on new vehicles of less than 6,000 pounds. 

While unlikely, there is always the possibility that any last minute attempt by our rulers in Congress to patch up the AMT fiasco will include some reductions or eliminations of certain tax breaks, including the $25,000 Section 179 for SUVs, which is a popular target of the environmental wackos.

Your personal professional tax advisor can give you more specific advice based on your actual numbers.

Good luck.

Kerry Kerstetter

 

Q-2:

Kerry,

 

Thank you for your response.  I think you have answered it.  I was being told that after this year a vehicle would have to have a six foot bed and weigh over the 6000 pound threshold to qualify for the accelerated tax deduction.  I am assuming you have not heard the same thing?  This is all based on the changes that came into affect a few years back where business owners could write off a much larger amount in the first year on vehicles in excess of 6000 pounds.

 

I may have myself thoroughly confused here.  Any help is appreciated.

 

Thanks,

 

A-2:

I have addressed this issue in several blog posts, as well as on the Section 179 page on my website.

As always, you should be working closely with your own professional tax advisor who should be current on these areas.  If you are trying to navigate your real estate business without professional tax assistance, you are in dangerous waters and need to find help ASAP.

Good luck.

Kerry

 

 

 

Labels: Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/19/2007 11:20:00 AM Send this post:

 
2008 IRS Standard Mileage Rates

IRS has officially released what it will allow for 2008 tax returns:

Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

• 50.5 cents per mile for business miles driven;
  
• 19 cents per mile driven for medical or moving purposes; and
  
• 14 cents per mile driven in service of charitable organizations.
  

As always, the official IRS statisticians are hip to the fact that vehicles being used for medical or charitable endeavors magically burn less fuel and suffer less wear and tear than they do when used for crass money making ventures. This disparity has never made sense in the past, and with the largest gap ever in these new rates, it continues to baffle me.

 

Labels: IRS, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/27/2007 08:07:00 PM Send this post:

 
S Corp & Vehicle Sec. 179

Q:

Kerry:

For an S Corp purchasing as automobile in 2006, used more than 50% for business, is there a limitation on 179 deduction?

Thanks

 

A:

There are several limits on Section 179 expenses for cars purchased by an S corp; both at the corp level and at the shareholder's 1040 level.

The amount of the potential Section 179 deduction will also depend on the car's weight.  If it's under 6,000 pounds, the maximum deduction is a tiny fraction of the amount possible for a vehicle weighing more than that much.

I have some general info on Section 179 on my website; but you  really  need to go over any plans in regard to how it would work out for your particular situation with your personal professional tax advisor.  S/he may even find that the deduction could be higher by purchasing the vehicle in your own personal name, especially if the S corp is generating large net losses.

Good luck.  I hope this helps.

Kerry Kerstetter

 

 

Labels: 179, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/24/2007 05:02:00 PM Send this post:

 
Buy SUV personally or through LLC?

Q:

Kerry,

I currently have a day job where my gross pay will be around $110,000 for 2007.  I also own a 60% stake in an LLC, seperate from my $110,000 job.  I need to buy an SUV for my LLC for about 80% business and my use only. In respect to Tax Code Section 179, what is my best strategy for buying a $30,000 SUV that is section 179-eligible? Can I personally take the Section 179 tax break? Or do I get only 60% of the section 179 deduction? Can I take the section 179 deduction on my own or does it have to be through the business?  Your help is greatly appreciated.

 

A:

This is the kind of thing you should really be discussing with your own personal professional tax advisor because there are a lot of factors to take into consideration.

Tax-wise, you could achieve pretty much the same benefits either way; buying it personally or through the LLC.

From a more practical sense, what would concern me more is how you and your partner in the LLC can ensure that you are each getting your fair share of the deal.  It's an easy enough task to specially allocate the Section 179 for the purchase to your K-1.  What gets messier is how to allocate the operating expenses.  Are you going to pay them personally or is the LLC?  The person who is handling the tax and accounting work for the LLC should also be part of this decision process to see if it would just be cleaner to have each of you take care of your vehicles on your own, which is what I frequently see with situations similar to yours.

There are obviously other factors to consider when working with a multi-owner business that wouldn't be a concern for a company owned by a single person or a married couple. 

Good luck.  I hope this helps you and your personal professional tax advisor work out the best game plan for your unique circumstances.

Kerry Kerstetter

 

Follow-Up:

thanks for the response Kerry!

 

 

 

 

Labels: 179, LLC, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/18/2007 05:44:00 PM Send this post:

 
SUV weight is important...

Q-1:

Subject: Toyota Highlander Hybrid sec 179?

 

Hi.  I found your explanation of the sec 179 deduction for schedule C  filers very helpful.

Question:  The Toyota Highlander Hybrid Limited 4WD lists a GVWR of exactly 6,000 lbs.  How would that be treated for Sec 179 purposes?

Thank you so much. 

A-1:

You are correct in pointing out the fact that a vehicle weighing exactly 6,000 pounds is subject to the luxury car rules and very minuscule depreciation and Section 179 deductions because the exemption is spelled out as vehicles weighing more than 6,000 pounds.

If the more generous depreciating and Section 179 deductions are important to you (obviously), what many people do is to have the dealer install an optional piece of equipment onto the vehicle that will add at least a few pounds to the manufacturer's listed weight of the standard option-free model.  I have actually heard of auto dealers offering things they call "Tax Savings Options Package" that are intended to take a vehicle with a starting weight of around 5,000 or 5,500 pounds and increase it to over the magical 6,000 pound threshold.  These usually contain such weighty options as towing packages and luggage racks. 

With your desired vehicle starting at 6,000 pounds even, any option that becomes a permanent part of the vehicle should be enough to put you over the qualifying weight.

Good luck.  I hope this helps.

Kerry Kerstetter

Q-2:

Thank you so much.  Your answer is extremely helpful. 

 

I have one last question on this topic.  The IRS seems to use GVWR as the standard by which vehicle "weight" is measured, but I read  somewhere that if it is a passenger vehicle, the "curb weight" is the weight that has to be over 6,000 lbs.  If this is correct, that would present a problem with the Highlander, which has a curb weight of  about 4850 lbs.  It would be hard to imagine having enough options to push it over 6,000 lbs.  curb weight.   However, I am hopeful that this was misinformation as I have been unable to find any reference to the distinction between curb weight and GVWR in the IRS publications.  Every reference I have found uses  GVWR. 

 

Is there any reason to worry about curb weight in a vehicle that is a "unibody" style SUV (not built on a truck frame) or is GVWR the  critical weight to keep above 6,000 lbs  for all vehicles?

 

Again,  thank you.  What an awesome site!

A-2:

I did address this issue in a recent blog post. 

Since SUVs are generally considered to be in the passenger auto category, they would have to use the lower unloaded curb weight.

Good luck.

Kerry

Follow-up:

THANK YOU!!!!  I went to the link and read it.  Not what I wanted to hear but sooooo very helpful.

 

 

Labels: 179, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/11/2007 03:06:00 PM Send this post:

 
66.7 Inch Truck Bed...

Q:

Subject: section 179.....Truck has less than 6 foot cargo bed

Thanks for your expertise!!

 

I am thinking of buying a 2008 Toyoto Tundra for my business.  Over 6,000 gross weight but the cargo bed is less than 6 feet long.....can I still take section 179 on the full purchase price of $40,000???

 

Thanks

A:

Checking the Tundra website, you are obviously looking at the CrewMax model, because that is the only one with an inside bed length of less than 72 inches.

Unfortunately, that vehicle does appear to fall under the SUV limit of a maximum of $25,000 Section 179 deduction, with the rest of the purchase price being depreciated over its class life of five years.

If you are truly desperate for maximum first year deductions, you should work with your personal professional tax advisor to see if it would be worth your while to take some more creative and aggressive steps, such as splitting the purchase between two entities, such as a C corp and a Schedule C business, where each could then claim up to $25,000 per SUV. 

Good luck.  I hope this helps.

Kerry Kerstetter

 

Follow-Up:

thanks for the help Kerry!!  I was afraid I was right on the limitation due to less than 6 foot bed..  I "assume " the worst case is IF I took the full 40k 179 deduction in 2007 and got audited.....would still get the $25k deduction but be required to depreciate the remaining 15k over 3-5 years..plus penalty and interest of course:(

 

thanks again....will consider the 2 entity concept.

 

My reply:

You really need to be working directly with your very own professional tax advisor because thinking like that (claiming Section 179 for the full $40,000 and praying for no IRS audit) is ridiculously reckless and can get you into serious trouble.  Any good creative tax pro will be able to save you hundreds of times more than his/her fee in taxes, as well as keep you out of trouble with the IRS.

Good luck.

Kerry

 

  

 

Labels: 179, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/09/2007 08:53:00 PM Send this post:

 
When will we know the 2008 IRS mileage rates?

Q:

Subject: 2008 standard mileage rate?

I have not been able to find out if this number as been released. 

I was impressed by the fact that your site was the only one I found with the 2008 Section 179.  Good Job!

Have a Wonderful Day!

 
A:

Based on the past few years, the IRS should be announcing their 2008 standard mileage rates any day now.  They may be holding off a bit until some of the fluctuation in oil prices tapers off.

The IRS announcement will be posted on their website. 

I'll also be posting it to my blog as soon as it comes out.

Kerry Kerstetter 

 

Follow-Up:

Thank you very much!

Have a Wonderful Day!

  

 

Labels: IRS, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/08/2007 11:26:00 AM Send this post:

 
Vehicle Weights

Q:

Subject: Question on 179

 

Hi,

 

I am a financial advisor and was wondering if you could answer whether or not section 179 (for the suv's) means "gross vehicle weight" or "gross vehicle weight rating (GVWR)"????  My understanding is that one can use the GVWR for the 6,000 lb. suv minimum.  I am wondering if I am correct? Or is it "curb weight"?

 

Thanks for your time.

 

Sincerely,

A:

Here is a quote from Page 10-2 of the 2006 TaxBook that covers this point:

Passenger autos rated at more than 6,000 pounds unloaded gross vehicle weight, or trucks and vans rated at more than 6,000 pounds loaded gross vehicle weight are not subject to the Section 280F depreciation limits.

Kerry Kerstetter

 

Labels: Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/04/2007 02:06:00 PM Send this post:

 
Reduced Sec. 179 For Vehicles?

Q:

Subject: your comment about vehicles

Hello Kerry,

 

In searching on the net for some credible comments about expensing 100% of movable business property, your website was the only one I found that seemed to have any straight forward comments.  What I've found varies so widely, it all would go good with an Alice in Wonderland story.  Also, what I've read (including on the IRS website) is that trucks with GVW over 6,000 had reverted back to a $2,600/yr max expensing, yet I had heard and read that the 100% (up to 100,000) had been extended, but all comments seem to be vauge at best.  Other than your website, can't find much on this subject.

 

Is per what you have posted on your website correct, that trucks with a GVW over 6,000 can still be expensed out in one year?  Did the IRS/congress indeed extend this through 2009 or ?

 

I found your website refreshing, as you seem to not beat around bushes.  Also, it appears you are in Arkansas.  Am looking to maybe find a state to live in where the real estate markets haven't gone out through the roof...  Do you do CPA work in just a particular location in Arkansas?  Does Arkansas have a personal income tax or corporate income/franchiese tax?

 

Thanks!

 

A:

I'm not sure where that rumor started about the reduction in the vehicle Section 179, but that's completely bogus.  As I've explained several times, the 6,000 pound exception to the Luxury Vehicle rule has been around since 1984 and has never been repealed. 

I have a lot of info on Section 179 on my website. 

As I frequently explain to people who ask me to prove that a certain item of tax law hasn't been changed, it's difficult to prove a negative (that something hasn't happened) and I don't have time to debunk every crazy tax rumor that's floating around.  The burden of proof should be on those who claim that something has changed.  Make those people who are telling you that the law has been changed prove their statements

Arkansas does have an income tax on both individuals and corporations.  You can see the rates and other details on the DFA's website. 

As you can see in my email signature, I haven't been accepting any new clients for a number of years and don't know if or when I will take any new ones on.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Hello Kerry,

 

I can see why you're booked up.  Your web page below is very clear and straight forward.  I'm amazed from what I found on many other "tax" sites and even when searching the IRS website about this, what I found was that for vehicles over 6,000 GVW, the yearly maximum had reverted back to something like 2,600, and yes, I kept trying to make sure I was searching for trucks, not SUV's.  It's hard to find competent and knowledgable tax accountants.  Appreciate the feedback and best wishes.

 

Labels: 179, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/11/2007 11:54:00 AM Send this post:

 
Vehicle Depreciation Recapture + Leasing

Q:

Subject: Thanks and a Question

Kerry,

Just discovered your website today.  Very nice.  Thanks for the hours you must devote to keeping this up to date.

I found your site by researching a question on recapture rules for SUVs used in a business.  You've probably already thoroughly addressed this, but I'm afraid I couldn't find the answer.  So, here's the situation:

Client placed into service a large SUV (greater than 6,000 lbs gross vehicle weight) on 12/1/03.  He took advantage of the generous Section 179 election available back then, so has no basis left in the vehicle.

Business use has never dropped below 50%.  He is considering selling the vehicle, which has a current value of around $25,000.  Questions:

1.      What is the earliest date he could sell the vehicle without being exposed to recapture?  Is it 5 years from the in-service date (12/1/08)?

2.      Even if client waits long enough to avoid any recapture, is he still subject to tax on the sale?  If yes, is it capital gains or ordinary income?

3.      Client would prefer to lease his next business vehicle rather than trade this one in on another purchased vehicle. Is there a better way to get the next business vehicle? 

 

Thanks so much for your time.

A:

I have discussed the recapture rules on several occasions, which you can probably find by searching my blog. However, a quick review may be handy here.

For some reason, you seem to have the mistaken impression that it is possible to wait out the recapture requirements.  That is the case for the Section 179 recapture requirement while still owning the vehicle.  However, that is not possible for a sale.

It is always important to keep tabs on the adjusted cost basis (aka book value) of business assets so that you can know what any potential gain or loss would be triggered by its sale.

Basically, the book value is the original cost of the asset less the depreciation (including Sec. 179) claimed up to the point of sale.  In your case, if you expensed the entire cost of the SUV, its book value is zero, which means the full amount of any sales price will be taxable at the 25% Federal depreciation tax rate, plus state tax if you are in a taxable state.  This would be the case if the sale took place now or 50 years from now.

Before a sale, there is a potential taxable partial recapture of the Section 179 if the asset's business usage slips below 50% in the first five years after you place it into service while still owning it.

If you are disposing of the SUV in order to acquire a newer model, there will be no taxable recapture if you trade in your existing one on the purchase of a new one costing at least as much as the old one is worth and you receive no cash or net relief of debt.

Replacing the SUV with one on an operating lease won't qualify for any tax break.  A disguised purchase lease may qualify.

I have never been a fan of leasing from a financial perspective and have longed warned about how much of a rip-off it is.  With very few exceptions, I have found that operating leases of vehicles are by far the most expensive way to finance their acquisition; often incurring an implicit interest rate of well over 30% APR.  This is even before the exorbitant charges assessed by leasing companies for such things as excess mileage and excessive wear and tear. 

Unlike conventional vehicle loans, which are required to make full disclosure of the interest rates, leasing companies are allowed to camouflage their implicit rates and even lie about  what it is.  I have actually heard employees of leasing companies deny that there is any interest charge built into their monthly lease payments.  However, since any financially competent analyst can very easily compute exactly what those charges are, I have amazed clients with the truth about what they are being charged.  This is useful in saving them a lot of money when they ask for my advice before signing up for a lease; but is disheartening news when they tell mine about the lease after they have committed to it and are faced with the reality of how much they are being screwed over.  A lease with a 30% built-in interest rate simply doesn't seem like much of a bargain compared to a purchase loan of zero to five percent.

These are all extremely basic tax and financial principles that any competent tax person should have no problem explaining to you and your clients; so before disposing of the old SUV or acquiring a new one, a tax pro should be consulted.

Good luck.  I hope this helps.

Kerry Kerstetter

 

 

 

Labels: Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/31/2007 03:19:00 PM Send this post: