Maximize Tax Deductions for New Business Vehicles
The new 2018 car and truck models are already in the showrooms.
If you are in the market for one or more vehicles for your business, look past the sticker prices when you weigh your decision. Don't forget to factor in all the tax aspects into the equation.
Generally, your firm can claim tax deductions for business vehicle expenses, but there are numerous twists and turns along the way. Notably, the tax law includes several limits to ensure that business owners don't go overboard. (For simplicity, let's assume for purposes of this article that you're purchasing a vehicle, although comparable rules apply to vehicles leased for business purposes.)
Briefly stated, you may deduct vehicle expenses in one of two ways.
1. Actual expense method. This method allows you to deduct your actual expenses based on the percentage of business use. For example, if you use a pickup truck 80% for business and 20% for personal use, you may write off 80% of your qualified expenses, including such items as oil and gas and insurance (see box below, What You Can Actually Deduct”). Plus, you're in line for depreciation deductions, subject to certain limits.
Some of the typical costs you can deduct with the actual expense method are:
2. Standard mileage rate. Using this method, you rely on a simplified standard mileage rate to deduct vehicle expenses. The IRS sets the rate annually. For 2017, it's 54.5 cents a mile (plus related tolls and parking fees). For example, if you drive the pickup truck 10,000 business miles in 2017, your deduction amounts to $5,450 (54.5 cents x 10,000) plus tolls and fees.
With either method, you must keep detailed contemporaneous records as proof in case the IRS challenges your deductions. For instance, you must record the date, location, distance and business purpose of each trip. Bear in mind that the recordkeeping for the actual expense method is even more burdensome because you must account for every deductible item.
Potentially Larger Deduction
The actual expense method may justify the extra hassle, as it frequently produces a larger annual deduction than the standard mileage rate. In particular, you may get a tax boost from the rules allowing you to recoup a vehicle's cost through depreciation deductions, subject to tax law limits.
Under current law, you generally can claim three tax breaks:
1. A generous current deduction under Section 179 (the expensing deduction) for the cost of qualified business property placed in service during the year, including vehicles,
2. A 50% bonus depreciation deduction if the property is eligible, and
3. A depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS) if there are any remaining costs.
For qualified business property, you may be able to claim all three, but with vehicles you likely will reach the max under Section 179 because of the so-called luxury car limits.
“Luxury Car” Limits
However, to deter taxpayers from claiming excessive deductions for top-of-the-line vehicles, Congress imposed “luxury car” limits, which actually kick in for moderately-priced cars, trucks and vans. For vehicles placed in service in 2017, the maximum deductions are as follows:
*Based on 50% bonus depreciation
For example, again using the 80% business use example, the maximum first-year deduction for a van placed in service in 2017 is $9,248 (80% of $11,560).
Despite these restrictions, for construction and related businesses, there is a special tax law provision, a qualified heavy-duty SUV with an unloaded gross vehicle rate of more than 6,000 pounds is exempt from the luxury car limits. In this case, the maximum deduction is capped at $25,000, far more generous than the usual luxury car limits. In addition, the vehicle is eligible for bonus depreciation and regular MACRS depreciation deductions.
Form of Ownership Matters
Keep in mind that the form of business ownership involved may affect the way vehicle deductions are handled:
- Generally, sole proprietors claim the deductions on their personal tax returns by attaching Schedule C.
- If a corporation reimburses business-related expenses to an employee who owns the vehicle, the firm generally deducts the reimbursements and the employee doesn't report any taxable income.
- For vehicles owned by a corporation, the corporation can deduct the full amount of the vehicle expenses, but personal driving benefits are taxable to employees.
This is just a brief overview of a complex set of rules relating to business ownership. Consult with your tax advisor regarding your situation.
If you're ready to buy a new vehicle for your business, there may be additional tax incentives for buying a 2018 model before the end of the year.
Significantly, in the first year of ownership, you're entitled to claim the three major tax breaks listed above, regardless of when in the year the vehicle is placed into service. In other words, you can buy a pickup truck late in December, drive it to a job site the last week in the year and still qualify for the full first-year tax benefits.
Caveat: MACRS deductions may be reduced if the cost of property placed in service during the last quarter of the year exceeds 40% of the cost of all property (not counting real estate) placed in service that year.
Similarly, if you're going to opt for an SUV that meets the requirement for the maximum $25,000 write-off, place it in service at the end of the year and maximize the deductions for the first year of ownership.
If you're buying a new vehicle late in the year, it'll be easier to keep track of your actual expenses for a short time if this would be beneficial. For vehicles acquired prior to 2017, you can generally switch from the actual expense method to the standard mileage rate in a subsequent year, including certain adjustments, but not the other way around if you previously claimed accelerated depreciation.
Possible Savings of Thousands of Dollars
These rules are complex, but business owners may be able to save thousands of tax dollars with some astute year-end moves. Talk to your tax advisor to ensure you understand all the potential tax ramifications when shop to buy a new vehicle for your business.