Heavy SUV’s provide hefty tax deductions
Written by: Larry F. Warner Jr CPA
With the economy somewhat improved and gas prices lower than previous years, business owners may be contemplating a new vehicle purchase. A nice new vehicle can make a business owners’ ride to work a lot more enjoyable especially if the vehicle can also create a big write-off for the business. Thanks to the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), many businesses can expense up to $500,000 for equipment and/or vehicle purchases (Internal Revenue Code Section 179 or 179 expense). But not all vehicles qualify for a big write-off as explained below.
Heavy vehicles qualify for full Sec. 179 expensing in the year of purchase and are defined as SUV’s, pickups or vans with a gross vehicle weight rating (GVWR) above 6,000 pounds and meet the following criteria:
1) Vehicles designed to seat more than nine passengers such as shuttle vans
2) Vehicles equipped with a cargo area that is not readily accessible directly from the passenger compartment and is at least six feet in interior length. Most pickups meet these criteria but please measure the bed length to verify they qualify!
3) Vehicles with: (a) an integral enclosure that fully encloses the driver’s compartment and load carrying device, (b) no seating behind the driver’s seat, and (c) no body section protruding more than 30 inches ahead of the leading edge of the windshield (delivery vans mostly).
Most business owners would not want to drive any of the above vehicles daily but would consider a heavy SUV. This type of vehicle, such as a Chevy Suburban or a Toyota Land Cruiser, can still yield up to a $ 25,000 write-off in the year of purchase plus 50% of the remaining purchase price can be taken as a depreciation expense in addition to the normal annual depreciation. Below is an example of a heavy SUV deduction.
Small business owner Bob buys a Ford Expedition for $ 45,000 in 2016 that weighs more than 6,000 pounds. Assuming he uses the vehicle 100% for business, he can claim a Sec. 179 deduction for $ 25,000 plus 50% bonus depreciation of the remaining undepreciated basis for $ 10,000 and finally the annual depreciation deduction of $ 2,000 for a total of $ 37,000 in write-offs the first year! This equates to 82% of the vehicle written off in the first year. Since Bob is in the 25% tax bracket, the SUV reduced his federal taxes by $ 9,250 so he recouped over 20% of their purchase in the first year. Not bad!
Had Bob bought a new car for $ 45,000, it would have been considered a luxury auto (nearly every car is a luxury car in the eyes of the IRS), and would have been limited to an $ 11,160 maximum first year deduction.
There are a few items to note when contemplating taking the Sec. 179 deduction. First, the 179 expensing is limited to taxable income, meaning you can only take it up to the point that the business breaks even for the year (you can’t create a loss with it). Second, the 179 deduction phases out dollar for dollar when equipment/vehicles purchases exceed $ 2.01 million (not usually a problem for most small businesses). Third, partners, LLC members and S Corporation shareholders are limited by the first two criteria at the entity level first. And last, the business usage must exceed 50% over the life of the vehicle or the owner will be required to recognize income for the amount below the 50% business usage.
AS you can see, a heavy SUV not only creates a nice ride but a nice tax deduction. Of course all the extra gas and maintenance that goes along with a big vehicle will also create a nice tax deduction. It’s up to the business owner to decide if the tax deductions are worth the extra costs and record keeping that goes along with having a company vehicle. Please let us know if we can help evaluating the purchase decision.