01 Nov 5 Year-End Tax Planning Strategies
As the end of the year approaches, it’s a good time to think of planning moves that will help lower your tax bill for this year. One strategy that will provide big tax deductions is purchasing a vehicle.
If you’re looking for a replacement business car, SUV, van, or pickup truck, then now is the time to act. If you want the deductions, you need to
- own the vehicle, and
- place it in business service before midnight on December 31.
The “placed in service” requirement means that you must drive the vehicle at least one business mile before midnight on December 31. In other words, you want to both own and drive the vehicle to ensure that it qualifies for the big deductions.
I would like to review five categories of vehicles and what you gain with the purchase of each type. I urge you to contact me if you have any questions about the tax-saving benefits associated with each of these vehicles.
- Used SUV, Crossover Vehicle, or Van
Assuming the newly purchased vehicle has a gross vehicle weight rating (GVWR) of 6,001 pounds or more, the vehicle gives you three big benefits:
- Section 179 expensing of up to $25,000 (in other words, a huge instant deduction)
- MACRS depreciation using the five-year table (quickly write off the vehicle over five short years)
- No luxury limits on vehicle depreciation deductions (because tax law doesn’t consider it a luxury vehicle)
Example. Before midnight on December 31, 2016, you buy and place in service a used $50,000 qualifying SUV for which you can claim 90 percent business use. Your business cost is $45,000 (90 percent times $50,000). Your maximum write-off for 2016 is either $29,000 or $26,000, computed as
- $25,000 in Section 179 expensing, and
- $4,000 in MACRS depreciation (or $1,000 if the mid-quarter convention applies because you placed more than 40 percent of your assets in service in the last quarter of the year).
- New SUV, Crossover Vehicle, or Van
If you purchased a brand-new SUV, crossover vehicle, or van, then you get an added benefit—bonus depreciation of 50 percent of the cost. So in the example above, your maximum 2016 write-off with the inclusion of bonus depreciation would be either $37,000 or $35,500, computed as
- $25,000 in Section 179 expensing,
- $10,000 in bonus depreciation, and
- $2,000 in MACRS depreciation (or $500 if the mid-quarter convention applies because you placed more than 40 percent of your assets in service in the last quarter of the year).
- New or Used Pickup
If you buy a pickup truck with a GVWR of more than 6,000 pounds and a cargo area (commonly called a “bed”) of at least six feet in interior length, then you can probably deduct the entire cost with the help of Section 179’s rules for trucks. With Section 179 expensing, you can deduct $500,000 of its cost off the top and then depreciate the remainder, and a remainder is highly unlikely.
- New or Used Qualifying Cargo or Passenger Van
You get the same Section 179 expensing benefit: a deduction of $500,000 for cargo and passenger vans, allowing you to write off the entire cost this year.
Tax law considers the vehicle a cargo van if it
- has a GVWR of more than 6,000 pounds,
- fully encloses the driver compartment and the load-carrying area,
- does not have seating behind the driver’s seat, and
- has no body section that protrudes more than 30 inches ahead of the leading edge of the windshield.
A passenger van that qualifies for Section 179 expensing of up to $500,000 is a van that has a GVWR greater than 6,000 pounds and is designed to seat more than nine people behind the driver’s seat.
- New Passenger Vehicle
Finally, if you buy a new passenger vehicle for business, you get up to $8,000 in bonus depreciation. A passenger vehicle is a regular car with a curb weight less than 6,000 pounds or an SUV, van, or pickup with a GVWR of less than 6,000 pounds. You can add the $8,000 in bonus depreciation to the $3,160 luxury limit, for a 2016 limit of $11,160.
If you’re already in the market for a replacement business car, SUV, van, or pickup truck, then this is a terrific strategy to lower your 2016 taxes. Please feel free to contact me in order to calculate exactly how much you will save with the purchase of your vehicle.