By Anna G. Duff, Tax Supervisor
As we enter the fourth quarter of 2016 and new cars, trucks, and SUVs are entering the roadways, we would like to advise our self-employed clients on the opportunity to maximize their tax savings from business vehicle purchases. The taxpayer advantageous Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) allows businesses to expense up to $500,000 of new and/or used equipment under IRC Section 179, along with receiving the 50 percent first-year bonus depreciation break for qualifying new (not used) personal property assets used in business, including certain vehicles. These developments can have a hugely beneficial impact on first-year depreciation deductions for vehicles used over 50 percent for business. Self-employed individuals who can treat their home office as a principal place of business will find it much easier to clear the over-50 percent-business-use requirement as there is no commuting to and from a place of business.
The following tips will be helpful as you consider the tax savings associated with a new business vehicle:
- The favorable depreciation rules are available for SUVs, pickups, or vans with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. These “heavy” vehicles are exempt from luxury auto depreciation limitations because they are treated as transportation equipment rather than passenger autos. Therefore, these vehicles are eligible for the Section 179 deduction (subject to $25,000 limit for certain SUVs), first year bonus depreciation (for new vehicles), and accelerated MACRS deductions. GVWR can be verified by checking the manufacturer’s label located on the inside edge of a driver’s side door.
- The $25,000 IRC Section 179 limitation on SUVs does not affect heavy vehicles designed to seat more than nine passengers behind the driver seat (e.g. shuttle vans); vehicles equipped with cargo area that is not readily accessible directly from passenger compartments and that is at least six feet in interior length (e.g. pickups with full-size cargo beds); and vehicles with: (a) an integral enclosure of driver 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 edge of windshield (e.g. delivery vans).
- Cars, light trucks, and light vans are treated as passenger autos and subject to the luxury auto depreciation limitations. The first year depreciation deductions for vehicles used 100% for business are $11,160 for new cars (with bonus depreciation), $3,160 for used cars (without bonus depreciation), $11,560 for new “light” trucks and vans (with bonus depreciation), and $3,560 for used “light” trucks and vans (without bonus depreciation).
A few items to watch when maximizing your deduction:
- The taxpayer’s IRC Section 179 deduction for the tax year can not exceed that year’s aggregate net business taxable income from all sources calculated before the IRC Section 179 write-off. However, excess Section 179 deductions can be carried forward to the following tax years. In addition, self-employed individuals are allowed to count their and their spouse’s (if married filing jointly) employment earnings along with the spouse’s net self-employment income as net business taxable income.
- When the taxpayer is a member of a partnership, a member of a multi-member LLC treated as a partnership for tax purposes, or an S corporation shareholder, the $500,000 Section 179 deduction maximum, the business taxable income limitation, and the phase-out rule all apply at the entity level and the taxpayer’s personal level.
- The taxpayer’s business-use percentage must continue to exceed 50 percent during the Modified Accelerated Cost Recovery System (MACRS) recovery period to avoid depreciation recapture rules.
- For more-than 5 percent shareholder-employee of S or C corporation only use of the vehicle in the corporation’s actual business activities counts as business use for purposes of meeting the more-than-50 percent business use requirement.
- To substantiate business use, heavy vehicles being listed as property are subject to strict record keeping requirements such as keeping a usage log for each year that shows beginning and ending mileage that year.
When a self-employed individual has a home office that qualifies as a principal place of business, all of the commuting from home to various temporary work locations counts as business mileage. This makes it much easier to clear the over-50 percent-business-use hurdle and qualify for the generous first-year vehicle depreciation write-off.
Keep in mind that there are strict requirements to claiming the home office deduction. For example, to have a deductible office in the home, the taxpayer must use the office space regularly and exclusively for business purposes. The office must either be the main place of business or the place where the client performs most of the administrative tasks.
Despite all the limitations and caveats, the heavy business vehicle and deductible home-office combo represents a major tax savings opportunity. We recommend our clients consider this strategy by acquiring a heavy vehicle before year-end and maintain a deductible home office for this year, or to wait until the early months of the next year due to the regular and exclusive business use requirement for home-office deductions.
Anna provides tax services and insights to public and private entities and their owners. Her responsibilities include income tax compliance, tax planning, and research of tax matters. Read more of Anna's tax insights on our blog.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.