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So What’s
all the hype about SUV’s!
This discussion does not pertain to vehicles that are titled in a company name or to businesses that operate multiple vehicles simultaneously. It does apply to small businesses whose owner owns and uses a vehicle for business purposes.
A lot of hoopla has been heard recently about the great tax savings to be obtained by buying an SUV rather than a regular ole automobile. Many of the details have been distorted and mis communicated. Here is the straight scoop!!
If you are in a small business, one in which a vehicle is regularly used and necessary, you generally have a choice of how to deduct your vehicle expenses. Your choice is to take an allowable cents-per-mile for every mile driven for business purposes or to deduct the actual expenses of owning and operating that vehicle. Just like the cents per-mile method only applies to the business miles, the actual expense method only applies to the extent that the vehicle is used for business. The actual expense deduction is usually derived by multiplying the actual operation expense by a percentage derived by dividing the business miles driven by the total miles driven. (For example: in one year you drive 40,000 miles and 36,000 of them are for business. 36,000/40,000 = 90%. 90% of every expense applicable to the vehicle would be deductible) As you can see right away, the cents-per-mile method only requires you to keep up with business miles where the actual expense method requires you to also keep up with total miles driven as well. You should derive from this that the record keeping is more detail-and time-consuming in deducting actual expenses rather than the cents-per-mile method.
To be concerned about whether you should purchase an SUV and receive all the wonderful tax benefits, you must first determine if you should deduct actual expenses or cents per mile expense. This is because the SUV rule only applies to actual expense deductions. The type of vehicle you drive does not affect the cents-per-mile method.
To help make this determination let's look at the two methods as applied to the same vehicle……….
Let's make some assumptions first: ---
You pay $40,000 for a new, over 6,000 pound, SUV and drive it 40,000 miles per year of which 90% are for business purposes. On the first day of the third year you sell it because it has 80,000 miles on it for 70% of its original cost.
IF you take the cents-per-mile method, you have a tax deduction of 36,000 miles @ the current rate of 36.5 cents per mile or $13,140 per year for two years or $26,280. The sale of the vehicle has no effect on your income tax.
If you take the actual cost of operation, you have a tax deduction of $1,000/year Insurance plus 3,500/year gas and oil plus 500 for tires plus $1,300 for car washes plus depreciation of $34,960 for a grand total spent over two years of $45,760. The deductible part is only 90% because the vehicle is only used 90% for business. This amounts to only $41,184…but still more than the cents-per-mile method. But wait, the sale of the vehicle under the actual cost method produces taxable income that is computed like this: $40,000 original cost minus $34,960 depreciation taken equals a remaining tax cost of only $5,040 which is then sold for $28,000 producing a gain of $22,960 which is 90% (the business part) taxable (or $20,664). The net tax deduction of this method now becomes $41,184 in deductions less $20,664 in taxable income from the sale or a total of only $20,520. This is obviously much less than the cents-per-mile method.
To get a better understanding you should know that the cents-per-mile method produces more of a constant deduction each year. Driving the same mileage each year gives the same deduction (as long as the IRS doesn’t change the rate!). The actual expense produces a huge deduction in year one and very small deductions in the following years.
Why then would you ever choose the actual method rather than the cents-per-mile method? There are a few instances that the actual method may make sense. Usually these are when you need that huge deduction that the actual costs are capable of producing due to a banner year of income: Here are a few:
1). You have had an outstanding and abnormal profit year that is not likely to be repeated and you need all the deductions that you can get this year. You know that the income from the sale of the vehicle later will still not place you in as high a tax bracket as you are in this year and therefore the tax on the sale of the vehicle will be much lower than the tax savings from the deduction this year.
2). You have had an outstanding and abnormal profit year that is not likely to be repeated and you need all the deductions that you can get this year. You expect to trade the vehicle and therefore won’t pay any tax on a sale. (In this case one must realize the newly received vehicle in the trade carries a reduction in depreciable cost equal to the gain that you did not pay tax on. This results in lower depreciation deductions and therefore higher taxes to equal out the tax on what would have been paid in a sale. Proponents of this method argue that the tax paid over a few years is preferable to payment all in one year. In any event the tax doesn’t go away, just gets spread out over several years.
3). You have had an outstanding and abnormal profit year that is not likely to be repeated and you need all the deductions that you can get this year. You elect not to sell the vehicle after the second year but instead retire the car from business use and give it to the spouse or one of the kids to use. In this case, the cessation of the vehicle for business use will probably trigger a recapture of some but not necessarily all of the depreciation deduction and render the taxable income from ceasing to use the vehicle to be less than the total income that would be derived from the sale.
4). Your operational expenses are far greater than the average portrayed in this example and will result in greater deductions.
If you decide to take actual deductions and you are considering buying or leasing a vehicle in the near future that will be used over 50% of the time for business, you should know that especially favorable tax treatment applies to certain vehicle models. Any vehicle with a manufacturer's Gross Vehicle Weight Rating (GVWR) above 6,000 pounds that (1) has an enclosed body built on a truck chassis or (2) is classified as a minivan or sport utility vehicle (SUV) can potentially qualify. Those that qualify can generally be depreciated much more quickly than a "regular" passenger car or light truck.
Similarly, if you lease a vehicle with GVWR above 6, 000 pounds and use it more than 50% of the time for
business, it
will not be subject to IRS rules that reduce tax write-offs for leased "regular”
cars and trucks.
Finally, vehicles with GVWR above 6,000 pounds are not subject to the
federal luxury auto tax .
Listed below are the 2002 models of vehicles that qualify for these
special tax benefits based on their GVWR at the time we checked
them. As you can see, it's a surprisingly long list. In addition,
there may be some we have missed (new and retooled models are coming out all the
time). Thus, always verify the GVWR for yourself before making a buying
decision. The GVWR can normally be found on a label attached to the inside
edge of the driver's side door.
Although the list deals with the 2002 model year,
purchasing a used vehicle and using it more than 50% of the time for business
purposes can also qualify you for more favorable tax rules discussed
above. Of course, that assumes the vehicle otherwise meets the
requirements (over 6,000 pounds, minivan or sport utility vehicle,
etc.).
2002 Vehicles with GVWR of More Than 6,000 Pounds
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Cadillac |
GMC |
Sources: www.intellichoice.com and www.carsdirect.com/researchcenter/home.
Again, you should always verify the GVWR for yourself before making a buying decision. The GVWR can normally be found on a label attached to the inside edge of the driver's side door.
© Copyright 2001 Smith, Conley & Associates
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