Tax Deductible SUV- Latest Changes 10-22-04. The Basics ExplainedPosted on Tuesday, November 2nd, 2004 by Des Toops
SUV Tax Deduction for vehicles over 6000 lbs GVW- 2004 Tax Planning Strategies
HEY SMALL-business OWNERS: How’d you like to use pretax dollars to buy an SUV or pickup?
Thanks to the 2003 Tax Act, many small businesses can instantly deduct up to $100,000 worth of new and preowned equipment in the year it’s first placed in service ($102,000 for 2004 after adjusting for inflation). The new $100,000 allowance is for tax years beginning in 2003 through 2005. The name of this generous break is the Section 179 depreciation deduction, and it can reduce both your federal income tax and self-employment tax bills. (You may get a state-tax deduction too.) Without it, you’d have to depreciate most business equipment over five to seven years. (Before the 2003 Act, the maximum Section 179 write-off for tax years beginning in 2003 and beyond was a mere $25,000.)
New and preowned “heavy” SUVs, pickups, and vans used more than 50% for business purposes are eligible for the $100,000 Section 179 write-off (as is, for that matter, most other small-business equipment, such as home-office furniture or software). So say you spend $60,000 to buy a super deluxe heavy SUV that’s used 100% in your self-employed business activity (meaning you conduct your operation as a sole proprietor, LLC member, or partner). Provided you make the vehicle purchase before year-end and start using it for business before then, you can probably deduct the entire $60,000 cost on this year’s business tax forms. (This assumes you don’t run a foul of the net business income rule explained below.)
The catch? Only that your newly acquired vehicle must be used more than 50% of the time for business purposes. But as I’ll explain below, setting up a business office in your home can give you a big leg up in meeting this requirement. Before we get to that key point, however, here’s a little more background so you’ll understand how the Section 179 break works in this context.
First, Pick Out a Suitably Heavy Machine
The Section 179 deduction is available only when your SUV, pickup or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. (First-year depreciation deductions for lighter vehicles are subject to much skimpier limits2.) Fortunately, it’s very easy to find attractive vehicles with GVWRs above the magic 6,000-pound figure. Most machines that look big enough to qualify do qualify. Examples include the Hummer H2, the Chevy Suburban and Dodge Ram pickups. You can verify a vehicle ‘s GVWR by checking the label on the inside edge of the driver’s door.
Then, Buy It (Don’t Lease It)
Here’s another very important point: Leasing a heavy SUV, pickup or van will disqualify you from claiming the huge first-year Section 179 deduction. Instead, you’d only be able to deduct your lease payments as you make them. For this reason, you should generally buy rather than lease heavy SUVs, pickups and vans that will be used over 50% for business. The fact that you may finance some or all of the vehicle ‘s purchase price won’t affect your Section 179 deduction in the least.
Next, Play the Home-Office Angle
As mentioned above, the lucrative Section 179 write-off is available only when you use your heavy SUV, pickup or van over 50% for business. Your business-use percentage is based on your business and personal mileage.
Unfortunately, this over-50% business-used test can be difficult to pass. You’re much more likely to clear the hurdle if you can also claim a principal place of your business is an office located in your home. Why? Because then all the commuting mileage from your home office to various temporary work locations (client sites, etc.) will be considered business mileage. Ditto for commuting mileage between your home office and any other regular place of business such as another office you keep in the city. (Frustratingly, if you only have an office outside your home, your drives between home and office won’t count as business mileage.) You can also treat all the mileage between your other regular place of business (that office in the city) and your various temporary work locations (client sites, etc.) as additional business mileage. Source: IRS Revenue Ruling 99-7.
More business mileage also means a bigger first-year Section 179 deduction. For example, a $60,000 heavy SUV used 100% business means a $60,000 first-year write-off (100% x $60,000 = $60,000). In contrast, 70% business use cuts your deduction down to $42,000 (70% x $60,000 = $42,000).
Last but not least, your home-office deduction counts as a business write-off as well. As such, it reduces your federal income-tax and self-employment-tax bills. And as if that’s not enough, you’ll probably also get a state-income-tax write-off.
All that plus the option of showing up for work in your pajamas. You just can’t beat it.
Making Your Home Office a Principal Place of business
So how do you make your home office a principal place of business if you haven’t done so already? The tax law gives the self-employed types (sole proprietor, partner or LLC member) two ways to qualify:
1st Way: You conduct most of your income-earning activities in the home office.
2nd Way: You conduct your administrative and management functions in the home office. However, to take advantage of this taxpayer-friendly qualification rule, you can’t make substantial use of any other fixed location (like that other office downtown) for your administrative and management chores.
For either qualification rule you must use your home-office space regularly and exclusively for business purposes during the year in question. Regularly means often and continuously, as opposed to occasionally. Exclusively means no personal use at any time during the year. (Granted, if you occasionally use the TV in your home office to catch the scores of your favorite sports team, the IRS is obviously never going to be the wiser but you do need to take these rules seriously.)
So if you don’t already have a home office dedicated to your small business, you’ll have to wait until next year to set one up and buy your heavy SUV, pickup or van. No problem. That gives you plenty of time to shop around for just the right vehicle .
Beware of the Taxable Income Limitation
A taxpayer’s annual Section 179 deduction can’t exceed that year’s aggregate net business taxable income from all sources (calculated before the Section 179 writeoff). With the huge new $100,000 Section 179 allowance ($102,000 for 2004), this little-known rule will now affect many more taxpayers than ever before.
The good news: When you conduct your business as a sole proprietorship or as a single-member LLC treated as such for federal tax purposes you’re allowed to count any salary, wages, and tips that you may earn as an employee as additional net business taxable income. If you’re married and file jointly, you can also count your spouse’s earnings from outside employment as well as any net self-employment income from business activities in which he or she actively participates. These taxpayer-friendly loopholes greatly reduce the odds that you’ll be adversely affected by the net business income limitation.
If, however, you run your shop as a partnership, multimember LLC, or S corporation, please consult your tax pro about how to take full advantage of the expanded Section 179 write-off. Why? Because the $100,000 deduction maximum and the net business income limitation apply at both the entity level and at your personal level. This means some careful planning may be required in order for you to collect the expected tax savings from your heavy SUV, pickup, or van.