Tax Breaks for Buying a New Business Vehicle
As year-end approaches many of my clients start thinking about next year’s tax bill and what they can do to manage it. Since the business use of a vehicle can be one of the larger deductions, a new set of wheels is usually the first to come to their mind. That’s why it doesn’t surprise me when a client calls to ask if he can buy a new $40,000 car for his business and write the whole thing off.
Thanks to some new tax breaks this year, you actually can write off the full cost of purchasing a new luxury SUV – provided it’s used 100% for business and its gross vehicle weight is more than 6,000 pounds. The vehicles that qualify for the 100% write off are gas guzzlers, but your business may have a need to haul people and materials and can justify the extra fuel costs.For lighter SUVs, passenger cars and light trucks the first-year depreciation is much smaller.
Example 1: Your business buys a new $89,200 BMW X6M and uses it 100% for business between now and December 31. On your 2011 business tax return or form, you can write off the entire $89,200 thanks to the 100 percent first-year bonus depreciation deal. However, if you spent the same $89,200 on a new sedan (which has a GVW under 6,000), your 2011 depreciation write-off would only be $11,060.
The tax breaks for used vehicles are less generous…
Example 2: Your business buys a used $40,000 Range Rover and uses it 100% for business between now and December 31. On your 2011 business tax return or form, you can write off $25,000 thanks to the Section 179 deduction rules. Then you can usually write off another $3,000 under the normal depreciation rules. Your first-year depreciation deductions add up to $28,000 ($25,000 plus $3,000 equals $28,000). In contrast, if you spent the same $40,000 on a used sedan, your 2011 depreciation write-off would be only $3,060.
The bottom line: If you want to take a 100% write off for a new business vehicle, make sure the GVWR is over 6000 pounds, the car is new and used 100% for business and you buy it before Jan. 1, 2012.
Now that is what you can do...but not necessarily what you should do. Getting an immediate 100% tax deduction for one of those heavy vehicles is certainly enticing, but is it a smart business and tax move? If a fuel efficient vehicle is more your style, be sure to read my post on Tax Credits for Green Vehicles.
Now that is what you can do...but not necessarily what you should do. Getting an immediate 100% tax deduction for one of those heavy vehicles is certainly enticing, but is it a smart business and tax move? If a fuel efficient vehicle is more your style, be sure to read my post on Tax Credits for Green Vehicles.
Changes in the tax law should never be the driving force for buying a new vehicle. Deductions aren’t worth it if you’re wasting your money on something your business doesn’t really need. But if you have been contemplating buying a new car for your business in 2011 or 2012, it might make sense to purchase this year since these new tax breaks are set to be scaled back after December 31, 2011.
Something else to think about is if you take the 100% write off in the first year, this will eliminate any tax savings that you would have had from depreciating the vehicle over time. Depending on what your profits look like this year, and what they are likely to be in the future, you might benefit more by spreading the deductions over several years.
Another "gotcha" that surprises many clients is when they go to sell the vehicle down the road (no pun intended). If you sell the SUV after having taken a 100% write off, you must pay tax on the entire amount you sell the vehicle for.
Example 3: Let’s say that two years later you become bored with the BMW from example 1 above and decide it’s time unload it and get into something new. You sell it on Craigslist for $55,000. You must include in taxable income the entire amount you receive for the vehicle - $55,000.
So what do you do if you want something new? Trade it in. Do not sell it or you will end up paying back a whole lot of tax.
If I trade in the vehicle for another car valued at $55,000, do I get another big tax write off? No. In a trade in, your zero basis carries over to the new vehicle and your tax write off is limited to the amount of additional cash you put in.
As you can see, deciding whether to buy a new vehicle and take the 100% write off this year requires a careful analysis of your specific tax situation. There are many other factors not even discussed here such as:
1. What if the business use is less than 100%?
2. Should I take the flat mileage rate?
3. Am I better off leasing or buying a car?
If you would like help figuring out which option is the best for you, just call my office and set something up; my contact information is on my website.
