SUV Tax Deduction for DummiesPosted on Wednesday, December 14th, 2005 by Andy Jones
SUV Tax Deduction for Dummies 2005 – The Basics Explained
Question: I have a small printing business, and the income from this business is about 30K. At my other fulltime job I get paid 80K. My wife makes 40K. I do my taxes with all 3 incomes combined.
I would like to know how the depreciation known as the SUV tax deduction applies to my situation. Overall we make 150K a year (30k+80k+40k), and that means that I pay taxes on that amount. by using the depreciation described in the article, If I purchase an SUV vehicle for business use, does that mean that I will get back $32,000 from the gvn’t the first year? (assuming that I already paid all taxes from my income) Please advise.
Answer: You might want to review this Bankrate.com article.
“However, when it comes to vehicles purchased utilizing the Section 179 break, legislators took back some of the benefit as it related to large sport utility vehicles. … That changed on Oct. 22, 2004 when the American Jobs Creation Act became law; now only company vehicles weighing 14,000 or more are eligible for the larger deduction amount.”
To be eligible for the deduction, you must purchase the SUV for business use. To qualify as business use, the property must be used more than 50% of the time for business in the year you place it in service. If you do not use 100% of the time for business , then you have to prorate the cost of the property by its business use percentage, which will correspondingly lower your deduction amount.
Based on that article, it looks like the expense and depreciation schedule appearing at the web site you provided is correct:
“Congress reversed itself last fall with passage of the American Jobs Creation Act of 2004 and cinched back the SUV loophole from $100,000 to $25,000 while retaining both the 50-percent bonus deduction and the five-year depreciation schedule. The deduction is claimed as a Section 179 expense, meaning you must be in business, filing a Schedule C or corporate tax return, to claim it.”
It is critically important to remember that tax deductions do not offset an expense 100%. “Even though a business expense can save you 30 to 65% in taxes — depending upon your tax bracket and state and city tax rates — never spend just to save taxes. It is not a dollar-for-dollar write-off.”
“Self-employed Tax Solutions” by Jean Walker, The Globe Pequot Press (2005) page 197
Worst case, as a married filing jointly, if you do not have any state or local taxes, you would effectively save 26% of each year’s deduction amount. You are not going to get back $32,000 in the first year. You will instead be able to reduce your taxable income by $32,000, which would result in a tax savings of at least $8,320 and potentially more depending upon your particular tax situation. However, your refund would be significantly less than $32,000 in the first year.
“2004 Individual Income Taxes Federal – Form 1040” by Kerry M. Kerstetter (January 6, 2004)
The following article points out a variety of factors you should consider before embarking on such a purchase, especially the high operating costs of these types of vehicles. Also, it is possible that even the current more favorable tax treatment will be eliminated as soon as the end of the year. Therefore, you will want to investigate your situation and act accordingly as soon as possible.
“Hummer tax break gets hammered” by J. McDonald, Bankrate.com
The Latest on the SUV Tax Deduction” by Chris Byrd, Self Employed Web (September 4, 2005)
Before you proceed with such a purchase, I strongly encourage you to review your tax situation with a tax preparation professional to determine exactly how much the tax benefit will be worth and whether or not the benefit offsets the considerable expense associated with these vehicles. You will also need to be able to prove to the government your percentage of business use by keeping a mileage log in the event you are audited. Furthermore, in order to claim the full deduction, you must only use the vehicle for business purposes.
Wonko Search terms: Section 179 deduction; married filing jointly tax bracket. SUV Tax Deduction, 6000 lb deduction, American Jobs Creation Act
Request for Answer Clarification:
I have one follow up question; what happens if I sell my vehicle after 2 years of use? Do I need to pay back the IRS for anything?
Clarification of Answer:
Depending on the sales price, you may have a capital gain or loss on the amount that exceeds your cost basis (your purchase price less accumulated depreciation and the Section 179 deduction). If you have a gain, some of it may be treated as ordinary income. The amount of the gain will be taxable.
These articles describe this situation:
“If you are claiming depreciation on a business vehicle , see Publication 463. If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. Include the excess depreciation in your gross income and add it to your basis in the property. For information on the computation of excess depreciation, see chapter 4 in [IRS] Publication 463.” The publication is available at www.irs.gov.
“Adjusted Basis” Small Business IRS Tax Map 2004
“Recapture of deduction. If the business use of an asset falls below 50 percent or the property is disposed of, part of the section 179 deduction must be recaptured. The recapture does not affect the total income that would be reported when the asset is disposed of, but may affect the income that is considered a capital gain versus ordinary income.”
“Depreciation Rules for 2004” by Dr. Ruby Ward, Utah State University (January 2003)