Q:

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

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

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

 

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